The US is heading for a 'swamp' recession which could mire the economy in a disappointing and slow recovery

• Some economists believe a 2023 recession will be short, shallow, or mild.
• However, JPMorgan's David Kelly said in a note it could be challenging to get out of this recession nevertheless.

The US appears headed for recession next year, but how severe it will be and how long it will last is still up for debate.

While a slew of economists think that such a recession should be shorter and milder than the last two the US faced, one forecaster thinks that could be a double-edged sword with a small downturn leading to an equally small — and therefore disappointing — recovery.

David Kelly, chief global strategist for JPMorgan Asset Management, called it a "'swamp' recession" in a note, suggesting the "economy would likely struggle to get out of" what is potentially a mild recession.

"We are on the edge of a recession, we think, and the recession is quite possible in 2023, but it's not like standing on the edge of a cliff. It's like standing on the edge of a swamp," Kelly told Insider.

According to Kelly, the issue is that if the recession is mild, the economy won't need to bounce back very far.

"The reason is partly of course because recessions are measured from peak to trough, and recoveries start at the trough," Kelly said. "The further you fall, the easier it is to bounce out of that."

Kelly added in a "bad" recession, vehicle sales, inventories, and housing starts drop to low levels and need to be rebuilt, in turn helping the economy rapidly grow. If these areas don't fall by a lot though, then they won't need to recover much.

"And because of that, those cyclical sectors of the economy aren't likely to rebound very strongly because they never fell very far in the first place," Kelly said.

While Kelly calls the upcoming recession a "swamp," some economists and experts are also saying it will be mild. Many also believe it will be shallow, such as KPMG chief economist Diane Swonk, economists surveyed by Reuters, and LPL Financial chief economist Jeffrey Roach. Mohamed El-Erian, chief economic advisor of Allianz, isn't so sure, saying "there isn't enough evidence to suggest it's short and shallow" if the US does enter a recession.

While some economists think a recession could be mild, William Lee, chief economist at the Milken Institute, told Insider that he thinks a recession that the Fed wants would be "even less than mild. It'll be almost imperceptible in terms of the labor market."

The last few recessions took a while for the job market to recover losses. Insider's Andy Kiersz found that it took over six years for the labor market to return to where it stood after the Great Recession — much longer than the recovery seen in earlier recessions. While the pandemic recession was the shortest on record, with the National Bureau of Economic Research dating the downturn from February 2020 to April 2020, it took months for the labor market to recover from the large fall in nonfarm payrolls — returning to pre-pandemic employment levels just this past summer.

Kelly said the next recession may not see unemployment climb as quickly as it did in the Great Recession or pandemic recession, not only because the potential recession isn't likely to be deep, "but also because there's a chronic lack of labor supply," Kelly said.

"So the good news is you wouldn't see a big spike in unemployment, but the bad news is it would linger," Kelly said.

While the unemployment rate might not quickly climb, some workers may still be worried about their jobs. Lee thinks the US economy has the "trappings of a white-collar recession in the works right now" — pointing to layoffs in tech and other professional sectors.

"White-collar jobs are being put aside, whereas there's a blue-collar boom going on," Lee said. This "boom" is happening in leisure and hospitality as well as goods and shipping jobs, Lee said.

Businesses may also not be so willing to cut workers during a downturn as they deal with a long-term labor shortage in part because of demographic changes and an aging population.

"Significant fiscal stimulus" may not be on the horizon in the next downturn and its recovery

Kelly's note also cautions that there likely won't be "significant fiscal stimulus" in this recession unlike the last few ones.

"The problem this time around is two-fold," Kelly told Insider. "One, the last three recessions, really like every recession since the 1970s, people haven't been worried about inflation. They are worried about inflation now."

On the policymaker's side, Kelly said "from a philosophical perspective, I think a lot of politicians would be slow to pass stimulus because they're afraid it might reignite inflation," he said. One note from the Fed states that fiscal stimulus during the pandemic contributed to the current sky-high inflation — a roughly 2.5 percentage point increase.

Kelly added that with a divided government with the Republicans' control of the House that they probably wouldn't pass massive stimulus ahead of the next presidential election.

"I think fiscal stimulus will be off the table, but of course that means the Federal Reserve is gonna be under pressure to try and help the economy," he said.

A recession may be coming, but several economic indicators are still strong

The US isn't in a recession just yet, and it may yet avoid one entirely, so it's hard to say for sure how exactly recovery will pan out.

Lee said due to the fiscal stimulus during COVID, a lot of people have additional spending power. Real personal consumption expenditures each month for the last few months have increased, where the last dip in real consumer spending was from June to July. Kelly wrote in his note that consumer spending "could continue to grow over the next year but it will likely be at a very slow pace."

While a recession looms, the labor market right now is strong, surpassing economists' estimates of monthly job growth. Nick Bunker, economic research director at Indeed Hiring Lab, previously told Insider that the labor market has "far more momentum than the Federal Reserve would like."

Real GDP was positive in the third quarter of 2022 after the first two quarters of the year were negative. The second estimate from the Bureau of Economic Analysis was even higher than the advance estimate — an increase of 2.9% instead of 2.6% as stated as the advance estimate.

Other measures are more mixed. The total index of industrial production, one economic indicator of a recession, has been rising and falling; it fell 0.1% in October like it did in August and June. It increased 0.1% in September.

In short, Kelly told Insider that a modest recovery from a shallow recession could be viewed as "tepid" as it will be a "mild improvement in things." But this isn't new.

"In fact, in three out of the last four recessions, you'd have to call the recovery disappointing," Kelly said, noting the pandemic recession as an exception.