Dive Brief:

• Tight credit will trigger a mild U.S. recession in the second half of 2023, limiting economic growth to 1.1% this year and 0.9% in 2024, and pushing up unemployment to 5%, according to Moody’s Investors Service.
• Higher borrowing costs are fueling pessimism among small businesses, Moody’s said, citing surveys by the National Federation of Independent Business. Also, consumer sentiment declined last month and the Conference Board’s Leading Economic Index since July has signaled a coming recession, Moody’s noted.
• “Overall, data indicates a deceleration ahead,” Moody’s said, predicting the contraction “will likely gain steam as the cumulative impact of high interest rates and tight credit is realized.” The Federal Reserve will probably begin cutting the federal funds rate early next year if, as forecast, increasing unemployment and a downturn in growth slow inflation toward the Fed’s 2% target, according to Moody’s.

Dive Insight:

Economists disagree about the timing of a U.S. downturn amid solid hiring and consumer spending, Moody’s said.

“Market consensus opinion is divided between a recession in the second half of this year or later in 2023 and into the first part of 2024, reflecting differing views on how long it would take for the economy to weaken given private consumption and labor market strength,” Moody’s said. “Enduring strength in the labor market could certainly delay the downturn to later this year.”

A springtime surge in job gains persisted in May as employers hired 339,000 workers, the Labor Department said Friday. The economy has added an average of 341,000 every month during the past 12 months.

Along with strength, the labor market in May showed signs of weakness.

The unemployment rate rose 0.3 percentage point to 3.7% in the biggest monthly gain since April 2020. Also, the average work week declined to 34.3 hours, the lowest level since the early months of the pandemic.

Moreover, the service sector, which makes up about 77% of gross domestic product, stalled last month. A measurement of the sector slumped to the lowest level in 2023, hovering just above the level that signals contraction, the Institute for Supply Management said Monday.

“There has been a pullback in the rate of growth for the services sector,” according to Anthony Nieves, chair of the ISM’s services business survey committee. “This is due mostly to the decrease in employment and continued improvements in delivery times — resulting in a decrease in the Supplier Deliveries Index — and capacity, which are in many ways a product of sluggish demand.”

“The majority of respondents indicate that business conditions are currently stable — however, there are concerns relative to the slowing economy,” he said in a statement.

Businesses focused on accommodation and food services; company management and support services; and professional, scientific and technical services grew the most among 11 service categories that expanded in May, the ISM said.

The seven categories that reported contraction included mining; agriculture, forestry, fishing and hunting; and real estate, rental and leasing, according to the ISM.

“We believe the recessionary pullback will be most visible in interest-sensitive sectors,” Moody’s said. High mortgage rates will increasingly slow residential investment, and tight credit will weigh on investment in nonresidential equipment and structures.

Fed economists in March predicted a mild downturn later this year, along with several private sector organizations including Fannie Mae. 

A credit squeeze following banking system turmoil and the impact from 10 straight hikes in the Fed’s benchmark interest rate will likely trigger recession during the third quarter and a 0.3% dip in growth for the year, Fannie Mae predicted last month.