How Likely Is a Recession in 2023?

It's a big question on a lot of people's minds.

Will a recession hit in 2023 and drive countless Americans out of a job? That's certainly the scenario many economists warned us about often during the latter half of 2022.

In fact, a lot of people made the (wise) decision to boost their savings account balances in 2022 to gear up for a potential economic downturn in 2023. But just how likely is a recession within the next 12 months?

Well, the truth is that we just don't know. Right now, economic conditions aren't particularly indicative of a recession. But if certain factors change over the next few months, the likelihood of a recession could increase.

A near-term downturn is unlikely

Is it possible that a recession will hit in 2023? Absolutely. But the likelihood of a first quarter recession is pretty low.

Right now, unemployment levels are almost the lowest they've been in 20 years, and consumer spending has yet to decline in a meaningful way. In fact, retail sales increased substantially during the last two months of 2022 compared to the same time the previous year. And while part of that was due to inflation, the fact of the matter is that consumers clearly still have money to spend. And as long as that continues, we should be able to stave off a recession.

Aggressive interest rate hikes could send the economy into a tailspin

Although we're starting 2023 with lower inflation levels than we saw during the midpoint of 2022, living costs are still way up across the board. And that means the Federal Reserve is unlikely to back down on its interest rate hikes.

The purpose of rate hikes is to encourage a pullback in consumer spending. If it costs more to borrow money, whether in the form of an auto loan, personal loan, or credit card balance, consumers may be less motivated to pump money into the economy. And that could narrow the gap between supply and demand that caused inflation to get so out of hand in 2022.

The concern, however, is that rising interest rates will fuel a major decline in consumer spending. That could be enough to drive the economy into recession territory.

It pays to be prepared

At this point, a near-term recession is pretty unlikely. But that isn't to say that economic conditions won't worsen during the latter part of the year. And so it's a good idea to prepare for that possibility by doing what you can to boost your savings.

If you have enough money in the bank to cover three months of bills, aim for four months' worth. If you can cover four months' worth, aim for five.

The more cash reserves you have, the better equipped you'll be to pay your bills if economic conditions sour and your job is yanked out from under you. And remember, if a recession doesn't end up hitting in 2023, the worst thing that'll happen is that you'll have even more money in savings to use as you need. That's hardly an unfavorable spot to land in.