What ‘Slowcession’ Means for Economic Growth

What Is a ‘Slowcession’?

A “slowcession” is a scenario in which the economy barely grows. It occurs when economic growth grinds to a near-standstill yet doesn’t turn negative, which is what happens when there is a recession.

This term was coined by Moody’s Analytics Chief Economist Mark Zandi in January 2023 to describe the state of the U.S. economy. According to Zandi, there’s a decent chance that a recession or downturn can be avoided, and that the economy will grow—albeit very slowly.

Key Takeaways

  • A “slowcession” is a sluggish economy that doesn’t quite tip over into a downturn or recession.
  • The term was coined by Moody’s Analytics Chief Economist Mark Zandi in January 2023 to describe the state of the U.S. economy at that time.
  • Zandi believes a slowcession is more likely than a recession, as inflation is moderating and households, companies, banks, and governments are generally in decent financial shape.
  • A slowcession is viewed as a better outcome than a recession, as it means the economy is at least growing, even if by not very much.
  • There’s a risk that the uncertainty of a slowcession hurts sentiment, weakens spending, and leads to a recession anyway.

Understanding Slowcession

Slowcession is a play on the word recession, a significant deterioration in economic activity. The words “slow” and “cession” are combined to describe an economy that is sluggish but not in a downturn.

Slowcession vs. Recession

A recession is said to happen after two consecutive quarters of negative gross domestic product (GDP). Usually, it results in company profits getting squeezed and lots of people losing their jobs. But not every recession is the same. Some are deeper and longer-lasting than others.

The economist who coined the term “slowcession,” Mark Zandi, also predicted the 2008 financial crash.

A slowcession, as implied in the name, isn’t very pleasant, either. However, unlike with a recession, economic growth isn’t negative during a slowcession, making it the lesser of two evils. Against this backdrop, there’s just about enough activity to keep the economy growing. But there’s also a lot of uncertainty and caution, which can limit spending, affect earnings, and put people out of work.

A slowcession basically can be thought of as a time of economic struggle that doesn’t quite tip over into a downturn or recession. The term was introduced in the following way in a note from Moody’s Analytics:

“The U.S. economy will struggle in 2023 with halting growth and higher unemployment. Recession is a serious threat. But the Moody’s Analytics baseline forecast—the most-likely outlook—holds that the economy will avoid a downturn. Call it a slowcession.”

Are We Heading for a Recession or a Slowcession?

At the start of 2023, most economists expected rising interest rates to trigger a recession. During the normal course of the economic cycle, we eventually reach a point of rampant inflation and higher borrowing costs, which almost always ends in a downturn. Historically, the Federal Reserve has been unsuccessful at combating high inflation. When the central bank starts aggressively hiking rates, it’s usually only a matter of time before the economy comes crashing down.

Several leading indicators also point to a recession being in the cards, including the Treasury yield curve and The Conference Board’s economic index. And there are a host of risks still on the table that threaten to worsen the state of the economy, including geopolitical tensions and the possibility of the COVID virus spreading aggressively again.

Zandi is aware of all these factors, yet he is still confident that a nasty recession can be averted. He believes inflation will be tamed before it pushes the economy into a downturn and that all the major participants (households, banks, companies, etc.) are generally in far better shape than they were in the run-up to previous financial crises and healthy enough to stave off another meltdown.

Why the Optimism?

In the Moody’s Analytics report, Zandi lists the reasons why he believes a slowcession is more likely than a recession. Key factors that will prevent a recession, according to him, include the following:

  • Inflation will moderate before wrecking the economy. According to Zandi, a combination of aggressive interest rate hikes, falling oil prices, easing supply chain bottlenecks triggered by the pandemic, and slowing job and wage growth will be enough to take the heat out of the economy before it crashes.
  • Consumers, banks, and businesses aren’t in bad shape. Zandi points out that normally before a recession, households and businesses are overleveraged, banks are stretched because they extended too much credit, too many houses have been built, and the state and local governments don’t have any money left to help out. That’s not the case now. Moody’s economist sees a healthy job market, a decent level of household savings, record profit margins, well-capitalized banks, just the right level of credit growth, and governments that are flush with rainy-day funds.

While Zandi believes a slowcession is likely, he hasn’t entirely dismissed the possibility that a traditional recession is on the way.

How to Prepare for a Slowcession

A slowcession is viewed as a better alternative to a recession. What we’re talking about is an economy that isn’t particularly prosperous but is at least still growing—even if very little.

What we could probably expect, based on Zandi’s words, is less inflation, which should give households and businesses some breathing space, and weaker economic growth. Prices would fall, but not much money will be spent and output will be stagnant.

Whether this sluggish economic growth would lead to an upturn, downturn, or sustained period of the same remains to be seen. A lot depends on sentiment. If inflation is tamed and confidence returns, GDP growth could gradually begin to rise. On the other hand, sluggish growth could lead the population to believe a recession is around the corner, scaring people into spending less and businesses into laying off staff and halting investments.

Nobody likes uncertainty—and a slowcession, as a diversion from the traditional economic cycle, brings plenty of it. Some might argue that it would be smart to prepare for the worst economically until things become clearer. Being prudent with your finances, trying to find ways to boost income, and putting money aside when possible is never a bad thing anyway.

Equity markets may also remain volatile. That’s generally good news for day traders and shouldn’t really matter to anyone else with longer time horizons—provided, of course, that they don’t fall into the trap of panicking and dumping buy-and-hold investments during a bear market.

Who came up with the term ‘slowcession’?

The term “slowcession” was coined by Mark Zandi, chief economist of Moody’s Analytics, in a research note published in January 2023. In the note, Zandi discusses why he thinks the U.S. economy is heading for a so-called slowcession rather than a traditional recession.

What does slowcession mean?

A slowcession is a condition in which the economy barely grows but doesn’t contract and enter negative territory.

How do you know that you’re in a slowcession?

Sluggish, near-zero economic growth is the main indicator of a slowcession. Zandi, the man who thought up the term, didn’t provide a specific threshold. He just said that it is characterized by halting growth and higher unemployment without the economy entering negative territory.

The Bottom Line

A U.S. economist’s use of the word “slowcession” has created a lot of debate, mainly because he makes some valid points and has proved in the past to be accurate at predicting the direction of the economy. According to Mark Zandi, Moody’s Analytics chief economist, a slowcession:

  • Is what the U.S. economy is likely to experience in 2023
  • Can be described as a condition in which the economy barely grows but at least isn’t negative and declining into recession territory

A slowcession is better than a recession, as it means there is some economic growth and less chance of widespread layoffs. However, it also isn’t synonymous with prosperity and, depending on the reaction, could lead to a prolonged period of uncertainty and stagnant economic output, which isn’t very desirable.

Article Sources
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