IHS Markit U.S. Forecast Update December 2022

Dec. 18, 2022

By George W. Hammond, EBRC director and Eller research professor

U.S. downturn delayed in the December forecast

IHS Markit has released their December 2022 forecast update for the U.S. The current forecast is based on the following assumptions:

A transition from pandemic to endemic continues.
The forecast includes all of the pandemic relief enacted, the Infrastructure Investment and Jobs Act, the recent Consolidated Appropriation Act of 2022, the Inflation Reduction Act, and current tax policy. It does not include the current administration’s plan to forgive a portion of student loan debt. Initial analysis suggests that the Inflation Reduction Act and student loan forgiveness will have modest impacts on headline growth and inflation.
The Fed is assumed to raise its policy rate to a range of 4.75%-5.00% by March 2023, unchanged from the November forecast. It temporarily overshoots the terminal range of 2.5%-2.75%. The Fed’s balance sheet declines by about one-third through 2024.
Tariffs and trade agreements between the U.S. and China since 2017 are assumed to continue.
Real foreign GDP contracted by 4.7% in 2020. Growth rebounded to 5.6% in 2021. The forecast calls for it to slow to 3.2% in 2022 and again to 1.3% in 2023, which is close to the IHS Markit characterization of a global recession.
The price of Brent crude oil rose to $113 per barrel in the second quarter of 2022, up from $80 per barrel in the fourth quarter of 2021. The price is forecast to drop back to $84 per barrel next year due to significantly slower global growth.

The baseline forecast (summarized here) is assigned a 55% probability. The pessimistic scenario is assigned 25% (down from 30% last month) and the optimistic scenario is assigned the remaining 20% (up from 15% last month). The inclusion of a recession in the baseline means more balanced risks across the alternative scenarios.

The baseline forecast calls for real GDP to increase by 1.9% in 2022 (annual average basis) before slowing to 0.3% in 2023. Growth rebounds to 1.8% in 2024 and again to 2.0% in 2025. The economy is projected to be slightly stronger than expected last month, reflecting stronger growth and firmer financial conditions recently.

On a quarterly basis, the forecast calls for real GDP to decline during the first and second quarters of 2023, a shortened and delayed downturn, compared to the December forecast. The peak-to-trough decline is 0.5%, which would be similar to the (relatively mild) early 2000s recession.

The forecast calls for headline inflation to spike in 2022 to 8.1%, then decelerate to 4.0% in 2023 and 2.3% in 2024 as the economy cools.

Nonfarm payroll jobs nationally dropped by 5.8% in 2020 but rebounded in 2021 with growth of 2.8%. The forecast calls for jobs to rise by 4.1% in 2022 and 0.6% in 2023, and then decline by 0.3% in 2024.

The unemployment rate peaked at 8.1% for the year in 2020 but fell to 5.4% in 2021. It is forecast to decline to 3.7% in 2022 before rising to 4.6% in 2023 and 5.0% in 2024.

Housing starts surged in 2021 to 1.61 million units. Activity remains strong in 2022 at 1.55 million starts, before dropping to 1.18 million in 2023 as interest rates take a toll on housing activity. Starts rebound to 1.24 million in 2024 and 1.37 million in 2025.

Exhibit 1 summarizes the December 2022 forecast from IHS Markit. Exhibit 2 shows the November projections and Exhibit 3 shows the difference.