The risk of a recession is nothing to brush off.
That’s according to Mark Zandi, the chief economist at Moody’s Analytics, who said in a Twitter thread Sunday that he’d been asked “with regularity” whether it really mattered if the U.S. economy simply weakened or plunged into an official downturn.
“The answer is an emphatic YES,” Zandi said in a tweet.
“The recession debate is not a parlor game,” Zandi added. “There have been 12 recessions since WWII, lasting 10 months on average, with a peak-to-trough decline in real GDP of almost 3%, and given the current size of the labor force we would lose about 4 million jobs, pushing unemployment to 6%.”
The pain of that would be most acutely felt by low-income people, who could be set back years financially since their savings have dwindled, Zandi noted. Already, credit-card debt balances among lower-income people have surpassed their pre-pandemic levels.
The question is whether that pain would be much worse than rising consumer prices, which the Federal Reserve is attempting to tamp down by increasing interest rates. Fed officials continue to say the level of inflation is too high for their liking, although it cooled last month.
Related: Fed hikes interest rate by half a percentage point, with benchmark rate projected to top out at 5.25%
“I think it’s increasingly important that the Fed put more weight on the potential of going into recession, and a little less weight on the concerns about inflation,” Zandi told MarketWatch in an interview Monday. “They need to be careful not to overdo the monetary tightening and push the economy into recession, because that’s a very dark path.”
Even if a potential downturn looks to be mild, that doesn’t mean everyone should rest easy, Zandi said: The possible 2023 recession could be global and make it more difficult to access support, a divided U.S. Congress may be less likely to dole out immediate aid, and the political fallout of an economic slowdown after years of disruption could be “very significant and severe,” he said.
“Once you get into a recession and things are going negative and we’re backtracking, it’s hard to know how that all plays out,” Zandi told MarketWatch. “Maybe it will be mild, but things start breaking when revenues start falling and businesses start going bankrupt and people start defaulting on their mortgages. Things can take a life of their own.”
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