Economists Michael Pearce and Matthew Martin of Oxford Economics provide insights into current economic conditions. Below are highlights of their recent research:
- In our latest forecast, we removed the mild recession from our baseline and now anticipate a prolonged period of below-trend growth. However, the risks of a recession are still elevated, so we will continue our recession monitor series, highlighting potential risks that could tip the economy into recession in the months ahead.
- To achieve a soft landing, the labor market will need to avoid a rapid rise in the unemployment rate. However, the uptick in the unemployment rate in October means it has now risen 0.3ppts from its low and is approaching the 0.5% threshold, or the "Sahm Rule", that has reliably identified the beginning of every recession since 1970. The Fed will hope this cycle proves the exception to the rule, as it would only require the unemployment rate to rise 0.1ppt to 4% over three consecutive months for the threshold to be reached.
- Despite the recent pullback in Treasury yields, our financial conditions index suggests conditions are tighter than a few months ago. With the Fed striking a hawkish line, we expect yields to remain elevated in the near term and for financial conditions to stay tight, weighing on growth. Rate-sensitive parts of the economy will weaken, but not enough to tilt the economy into recession, particularly when recent data suggests the largest squeeze from tighter lending conditions may have passed.
- Although we removed the recession from our baseline forecast, we think the risks remain elevated over the next 12 months. A potential government shutdown, if it occurred, would weigh on growth, while uncertainty over the 2024 elections could drag on investment and, therefore, economic growth. Should the conflict in the Middle East broaden severely, the fallout in energy markets has the potential to increase inflationary pressures and shave GDP growth enough to push the economy into a mild recession.
