The worst of inflation may be behind us, but recession is not yet here.

(CNN) — A recession was expected in 2023.

This time last year, sky-high inflation barely budged, leaving the Federal Reserve no choice but to keep raising interest rates. The S&P 500 was already in a bear market. Layoffs, especially in the technology sector, have been piling up as companies cut costs.

And to top it all off, the Philadelphia Phillies made it to the World Series, which is a historically terrible sign for the economy, since every time a team wins, a recession hits.

But the Phillies’ eventual loss to the Houston Astros last year was apparently a win for the economy, as a recession never materialized.

In truth, the reasons he failed to make it in 2023 have little to do with baseball and more to do with good politics and a little luck.

However, as the standard investment disclaimer states, past performance is no guarantee of future results.

Favorable circumstances for a recession in 2024

The risk of a recession has increased since the Federal Reserve began its tightening cycle in March 2022, Federal Reserve Chairman Jerome Powell told reporters in December. However, he assured that “there is no reason to believe that the economy is now in recession.”

But even when the economy seems to have never been in better shape, there is always the possibility of a recession next year, Powell added.

This is because unforeseen economic crises (such as a global pandemic) can occur at any time.

Barring unforeseen future events, some economists believe current conditions could still lead to a recession next year.

“The recession has simply been delayed, but not completely eliminated,” said Kathy Bostjancic, chief economist at Nationwide Mutual.

One indicator Bostjancic watches closely is employment in the private services sector, excluding health care and education. The remaining private services sectors (such as transport, entertainment and hospitality) are more cyclical, meaning they are more vulnerable to economic shocks. Thus, studying movements in this sector provides a better understanding of the state of the economy, he said.

Monthly hiring in the private services sector, excluding health care and education, was 92,000 in November 2022, according to the U.S. Department of Labor. However, the November 2023 employment report shows a sharp drop, with 22,000 new hires in the sector.

Overall, there has been strong job growth over the past year, which has helped keep the unemployment rate below 4%.

However, Bostjancic is not sure that this will continue into the new year. The economist estimates there is a 65% chance of a mild recession in 2024 and predicts the unemployment rate will rise to 5% in the third quarter. That’s nearly a percentage point higher than Federal Reserve officials’ average forecast for the 2024 unemployment rate, according to the latest set of economic forecasts.

The drop in income due to unemployment that Bostjancic predicts will likely force consumers to cut spending and lead to a recession, he told CNN. And, unlike in recent years, consumers don’t have “extra fuel” to fall back on as they’ve exhausted savings accumulated during the pandemic, he added.

There is also the risk of recession coming from the Federal Reserve itself. This is because the central bank’s current high level of interest rates is aimed at slowing the economy to help bring inflation closer to its 2% target.

But if inflation continues to fall and the Federal Reserve waits too long to cut interest rates, it could hamper economic growth, said Louise Shaner, a senior fellow at the Brookings Institution and director of policy at the Hutchins Center for Fiscal and Monetary Policy.

This means it will be difficult for the Federal Reserve to determine when it makes sense to cut interest rates, if it makes sense to do so.

For example, Shaner explained, because interest rates take time to spread through the economy, previous actions by the Federal Reserve may have already slowed the economy enough to bring inflation closer to target, although this is not yet reflected in the data. If the Federal Reserve leaves interest rates unchanged, they could end up rising above them and causing a recession “by mistake.”

On the other hand, there is also the danger that inflation will be much more difficult to combat.

If the Fed wants everyone to believe it’s committed to bringing inflation down to 2%, “it’s going to have to orchestrate a slowdown,” Shaner told CNN.

This could mean keeping rates higher for longer than investors currently expect, or even raising interest rates.

Another year without a recession

It is possible that the Federal Reserve will implement a soft landing, a term used to describe a scenario in which inflation cools without a significant rise in unemployment.

In the 11 cycles of rate hikes over the past 60 years aimed at reducing inflation, this has happened only a few times: in 1964, 1984 and 1994. But that doesn’t mean it can’t or won’t happen again. . .

David Mericle, chief US economist at Goldman Sachs, is one of those who believes in a soft landing.

“The hard part of fighting inflation is over,” he wrote in a November note, adding that “the conditions for inflation to reach its target again are in place, and the worst blows of monetary and fiscal adjustment are behind us. .” back”.

While there were “good reasons to be concerned” about a recession last year, he said, “he doesn’t see a particularly elevated risk now.”

With the unemployment rate hovering at historically low levels and millions of jobs still at stake, “it would be surprising if we were to experience a sudden deterioration in the labor market,” Mericle told CNN.

His team sees only a 15% chance of a recession in the next 12 months. He called this the “unconditional historical average,” meaning that in any given year he believes there is at least a 15% chance of a recession occurring. But with inflation near its peak during the banking crisis that began in March 2023, Goldman Sachs economists saw a 35% chance of a recession in the next 12 months.

They lowered their forecasts starting in June as inflation continued to improve, the labor market became more balanced and banking stress dissipated.

While Mericle doesn’t see any “obvious” reason for a recession, he said it would likely be “some kind of unforeseen shock to the economy.”