New Year, New Outlook

Episode Summary

Executive Summary: The podcast debates the 2023 U.S. economic outlook, centering on whether the economy will slip into recession. Chris is most hawkish at 70% odds and expects a mild second-half recession driven by prior Fed tightening; Marissa is at 55%, and Mark holds 50% with a nonrecession baseline. They also assess Fed policy, housing, global risks, the dollar, and launch listener Q&A.

Main Topics: 2023 recession probability debate (Priority: 5/5): The hosts compare recession odds and argue over whether the economy is already on a path to recession or merely a growth recession. Chris says 70%, Marissa 55%, and Mark 50%, with Mark's baseline still avoiding recession. Baseline outlook versus downside scenarios (Priority: 5/5): The discussion distinguishes between the official baseline and downside cases. The baseline calls for very weak growth, near-stall job creation, and broad sectoral softness, but not an NBER-defined recession unless conditions worsen. How severe a possible recession would be (Priority: 4/5): Chris outlines a likely mild recession beginning around Q3 2023, shorter and shallower than the postwar average, with 1-2 million job losses and unemployment near 5%-5.25%, versus the typical 10-month, ~3% GDP contraction recession. Fed policy and inflation dynamics (Priority: 5/5): The hosts debate whether the Fed tightened too late, whether 5% is the likely terminal funds rate, and what would force additional hikes. Mark emphasizes inflation persistence as the main trigger for a baseline change into recession. Sectoral weakness and housing stress (Priority: 4/5): Even without a full recession, interest-rate-sensitive sectors are already weak. Housing, mortgage finance, construction, commercial real estate, transportation, and parts of manufacturing are cited as being in recession or near it. Listener questions and ratings of the Fed (Priority: 3/5): The show introduces a new listener Q&A format and answers questions on the Fed's policy conduct, giving mixed grades: Marissa says B-, Chris says B+ on the fed funds rate and D on QE, and Mark says B. Dollar strength and reserve currency status (Priority: 3/5): The hosts expect the dollar to remain strong in the near term because of U.S. relative strength, higher rates, and global uncertainty. They see little near-term risk to dollar reserve status despite geopolitical efforts to reduce dependence on it.

Key Arguments: Chris argues recession odds are 70% because prior tightening is already baked into the economy and likely to produce a mild downturn in the second half of 2023. Marissa keeps recession odds at 55% because households and businesses remain financially healthy, labor markets are cooling without mass layoffs, and the Fed has clearly signaled its path. Mark holds 50% because the baseline shows weak growth but not enough evidence of a broad-based recession; he sees the economy as fragile but not yet broken. All three agree many sectors are already under severe pressure, especially housing-related industries and interest-rate-sensitive areas like finance, construction, and transportation. Chris says additional global shocks would quickly push the U.S. into a more certain recession, but absent those shocks the current tightening alone may be sufficient. Marissa argues housing wealth losses may not significantly hit most households because many homeowners remain in positive equity positions after large pandemic-era price gains. Mark says the key variable for changing his baseline is inflation persistence; if inflation stays hot and the Fed must raise rates above 5%, recession becomes much more likely. The group sees the dollar remaining strong because the U.S. is still viewed as a relative safe haven and other major currencies lack a clear alternative reserve role.

Data Points: Recession probability: 70% - Chris's estimate that the U.S. will enter recession in 2023 Recession probability: 55% - Marissa's estimate of recession odds in 2023 Recession probability: 50% - Mark's baseline and personal probability estimate Fed funds target at start of 2022: 0% - The policy rate before the tightening cycle began Fed funds target after latest hike: 4.25%-4.50% - Post-FOMC target range after a 50 bp increase Expected terminal fed funds rate: 4.75%-5.00%+ - Market and Fed expectation for the peak policy rate Typical postwar recession length: 10 months - Mark's benchmark for average recession duration since World War II Typical peak-to-trough GDP decline: Almost 3% - Average GDP contraction in a postwar recession Jobs lost in a typical recession: Almost 4 million - Estimated employment decline given today's labor force size Unemployment rate in a typical recession: About 6% - Mark's illustration of a typical recession outcome Chris's projected job losses in a mild recession: 1-2 million - His estimate for a shallower downturn than average Chris's projected recession start: Q3 2023 - Timing for the onset of the mild recession scenario Chris's projected unemployment rate: 5.0%-5.25% - His expected labor market peak in the mild recession scenario GDP growth in baseline: Less than 1% Q4/Q4 - Mark's no-recession forecast for 2023 growth Inflation peak: About 9% - Consumer price inflation peak reached in June 2022 Recent CPI inflation: 7.1% - November year-over-year CPI referenced in the discussion Expected inflation by end-2023: About 3.5% - Mark's outlook for CPI moderation Fed's CPI-equivalent target: About 2.5% - Mark's estimate of the inflation goal on a CPI basis One-year five-year forward inflation expectation: About 2.25% - Bond-market inflation expectation cited by Mark Five-year breakeven inflation: About 2.0% - Another market-based inflation expectation cited by Mark Retiring colleague tenure: 28 years - Sophia Korpetsky's service at Moody's Analytics, acknowledged at the start of the show Employment report coverage tenure: 25 years - Sophia's years writing on the employment report, per the hosts

Pivotal Quotes: "My baseline has a growth recession... It's right on the edge between a growth recession and a very mild recession." — Chris Dorides: Chris characterizes the 2023 outlook and explains why he thinks recession risk is very high but not necessarily severe "I feel increasingly more confident that inflation is going to come in. And that's not going to be the problem." — Mark Sandy: Mark explains why he stays at a 50% recession probability and what would have to change to alter his baseline "We got to put a recession in our forecast." — Mark Sandy: Mark explains why moving from no recession to recession requires a high conviction threshold in the baseline forecast

Implications: Listeners should expect slower growth, weak housing and manufacturing, and continued policy tightening risk, but not necessarily a deep recession unless inflation or global shocks worsen. The dollar likely stays firm, and the new Q&A format will let the hosts address recurring economic concerns directly.