What Steps Should DB Plan Sponsors Consider Taking Ahead of a Potential Recession?

Is a recession lurking around the corner in 2023? If so, how might it impact defined benefit (DB) plan sponsors—and what steps, if any, should they consider taking?

To shed some light on these burning questions, we recently sat down with Chief Investment Strategist for North America, Paul Eitelman, and Senior Consultant Mike Sylvanus. Below are their answers, edited for length and clarity.

Q: Do we think a U.S. recession is likely in 2023?

Paul Eitelman: Economists are notoriously bad at forecasting recessions, but the combination of an overheating labor market, elevated sticky inflation and a Federal Reserve (Fed) that appears committed to restoring price stability at any cost suggests recession risks are much higher than normal right now. We assign a 55% probability of an economic recession in the United States over the next 12 months.

The speed of the hiking cycle—the fastest since the Paul Volcker (former Fed chair) era in the early 1980s—and the associated sharp tightening of financial conditions amplifies these concerns. Current economic data is mixed. Leading indicators—like manufacturing orders—are already contracting. But more coincident and lagging data like nonfarm payrolls are still demonstrating resilience. This is normal for a late-cycle slowdown, and the Fed’s obsession with delivering a slowdown in labor markets and wage inflation risks the central bank overtightening into a policy mistake.