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What happens if we get a severe recession in 2023?

ACT Research and former Eaton economist rates chance of a deep pullback at 20%

ACT Research economist Jim Meil says a severe recession should be among scenarios for the economy. (Photo: Alan Adler/FreightWaves)

COLUMBUS, Ind. — Soft landing. Hard landing. Mild recession. What if none of those outcomes come to pass and the nation is thrust into a severe recession in 2023?

It has to be among the possibilities, according to Jim Meil, ACT Research principal for industry analysis, who served as vice president and chief economist at Eaton Corp. for 30 years.

As Fed watching peaks heading into Friday’s meeting at Jackson Hole, Wyoming, Meil said he puts the little-discussed chance of a severe recession at 20-25%. The likelihood of a mild recession is 60-65%.

“It could arise from seeing another oil price shock. All it takes is a few errant missiles over the Persian Gulf,” Meil told FreightWaves following a presentation at the ACT Research Seminar 67 on Wednesday. “Now we’re not talking about $120 [a barrel] oil or $150 oil. Now we’re back to saying $180 oil and not $6 or $7 or $8 fuel in California but $10 fuel across the country.”

Mostly guesswork

Meil’s rationale, which he told his audience is mostly guesswork, plays out in a quadrant of known knowns, things we understand and may be able to control; known unknowns, things we’re aware of but don’t have a handle on; unknown knowns, things most people don’t understand; and unknown unknowns, things we are neither aware of nor understand.

The rubric for considering a severe recession, according to ACT Research economist Jim Meil. (Image: ACT Research)

The last group — unknown unknowns — includes the COVID pandemic and Russia’s intentions for Ukraine following its invasion six months ago. Historically, the 1973 Arab-Israeli war and the reaction of the Oil Producing and Exporting Countries (OPEC) and Saddam Hussein’s 1990 invasion of Kuwait belong in this category.

5 possible black swan events

At least five things could cause a so-called black swan event. That’s something beyond expectations of a situation and has potentially severe consequences: 

  • The Federal Reserve overshoots on trying to reduce inflation and raises interest rates too fast and too much, squelching economic growth.
  • Global economic weakness becomes a contagion because of Europe natural gas and nuclear electricity shortages combined with shaky finances in developing countries.
  • The Russia-Ukraine conflict escalates or widens.
  • China-Taiwan tension boils over.
  • The reemergence of COVID, further spread of monkeypox or some other public health crisis.

“Then, all of a sudden, the dominos start to fall,” Meil said. “Imagine if some trigger-happy Chinese surface-to-air missile operator put in the wrong coordinates and Nancy Pelosi’s plane gets hit. You and I are not here. We’re undergoing basic training in Camp Lejeune. I’m teasing, but there are shocks that can happen that all of a sudden take you off the regular path.”

The most likely and least severe shock, he said, would be the Federal Reserve tightening credit too much and choking economic growth.

“The Fed has a track record of screwing up,” Meil said. “It sort of screwed up in 2007 and that led to the 2008 recession, or at least it exacerbated the problem. The 2008 recession is one where we had $150 oil. People forget that. They think it was all housing, housing, housing.”

The worst-case scenario is far less likely than a mild recession because the underlying economy is healthier.

“We do have a very strong labor market. And that is one of the foundations for this thought that it’s a mild recession,” Meil said. “We’ve raised interest rates but we didn’t have to go through what the Fed did 45 years ago in 1978 and 1979. There’s real resilience out there, but it’s always possible to have the black swan happen.”

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Alan Adler

Alan Adler is an award-winning journalist who worked for The Associated Press and the Detroit Free Press. He also spent two decades in domestic and international media relations and executive communications with General Motors.