- In an interview with Insider, Moody's Analytics chief economist Mark Zandi broke down his outlook for 2023.
- He sees a 50% chance of recession next year, and a soft landing remains possible.
Commentators for months have diagnosed a bleak outlook for the US economy, but to Moody's Analytics chief economist Mark Zandi, it's a coin toss.
A top advisor to policymakers and one of the first economists to warn of the 2008 financial crisis, he put recession odds for 2023 at 50%. But believes it's possible the Federal Reserve can stick a soft landing — with a little bit of luck.
"It's a very close call. But at the end of the day, if you're saying, pick a side, the side I pick is no recession," Zandi told Insider in a Thursday video call.
To be sure, the economy is going to struggle in any scenario for the coming 12 to 18 months, he warned, adding that he wouldn't argue with anyone who expects a downturn.
On the plus side, the October CPI report showed annual price growth decelerated to 7.7% from the June peak of 9.1%, adding further evidence that inflation has peaked. Zandi predicted inflation will cool to the Fed's 2% target by sometime in 2024.
But for 2023, he expects the economy will grow at a much slower pace, with unemployment rising to a little over 4% from 3.7% now.
What's more, it's unlikely the economy could withstand another unanticipated global event like Russia's invasion of Ukraine, Zandi explained.
"There are 'known unknowns' like oil prices, what China does with the pandemic and COVID shutdowns. And then there's a lot of 'unknown unknowns.' Things we cannot even contemplate at the moment," he said.
For example, a Chinese invasion of Taiwan isn't something that can be priced into markets, and the same goes for other potential military conflicts, he said.
"The Fed needs to catch a break, and nothing else can go off the rails."
A housing correction, but not a crash
A key factor in the US economic outlook is the housing market, which has seen demand collapse as the 30-year fixed mortgage rate has soared to about 7% from 3% a year ago.
In fact, demand is below levels that were seen during the worst of the pandemic, Zandi said, noting that you'd have to look back to 2008 to see a comparable drop.
But there are key differences between 2008 and now. Price declines during the last crash were concentrated in a few places around the country, but 2023 will usher in widespread, falling prices in every state, he said.
During 2008, some markets saw home prices dive up to 90%, precipitating a wave of defaults and foreclosures. But next year, Zandi doesn't think that will happen, in part because the pandemic housing market was so affordable for many Americans.
"I expect prices to be down 10% peak to trough, with no recession," he said. "That's my baseline. I view that as a correction, it's not a crash. It's not circa 2008, 2009, when prices fell 25%-30% nationwide."
Mortgage rates must ease, prices have to fall, and incomes need to rise for the housing market to come back, he said. And if a recession does arrive, he cautioned that the decline in home prices would be closer to 20% instead of 10%.
Still, Zandi tried to put it into context, noting that prices are up 40% since the pandemic.
"So for people who got their homes and mortgages in the last year, they're not going to feel great about it," he said. "They could be underwater. But, it's a small piece of the pie. So it's a correction, not a crash."