The U.S. economy is teetering on the edge of recession

Entering the first quarter of 2023, there is a growing danger that the U.S. economy could slip into recession. While the U.S. consumer has been largely resilient so far, higher interest rates have weighed on home-building, trade and business investment.

In particular, higher inflation is squeezing consumer wallets, cutting the personal saving rate to 2.3% and boosting credit card balances. While excess savings from the pandemic supported spending in 2022, this stock is now drying up and it is unlikely consumers will see further aid from the federal government.

In addition, mortgage rates have more than doubled since the start of the year, contributing to continued declines in home building, home sales and consumer spending associated with setting up new households. Moreover, the dollar rose by roughly 9% in 2022, even after a late-year sell-off. This very high exchange rate, combined with weakness overseas, will likely boost imports and curtail exports thus dragging on overall economic growth. As the economy confronts these challenges, it is likely to see very weak real GDP growth with a greater than 50% chance of tipping into a recession by the end of 2023.