Economists have reversed their forecasts of an impending recession in the US as inflation approaches normal levels while the labor market remains stable.
The last Wall Street Journal A survey of economists found that their average probability of a recession in the next 12 months has fallen to 54 percent, down from 61 percent in the last two polls in April and January.
While that forecast remains high compared to pre-pandemic standards, it represents the largest cross-survey percentage drop since August 2020, when the economy began to recover from the disruptions of the lockdown.
The improving economic outlook comes on the heels of a number of favorable economic indicators suggesting that the Federal Reserve’s rate hikes could bring inflation back to target levels without triggering a painful recession.
If so, that would be a major political win for President Joe Biden as he seeks re-election next year after his administration came under fierce criticism when inflation hit a four-decade high last summer.
The latest Wall Street Journal survey of economists found their average probability prediction of a recession in the next 12 months dropped from 61 percent to 54 percent
Biden recently touted his policies as ‘Bidenomics’, taking credit for falling inflation
Republicans have been hammering Biden on economic issues since he took office, but if inflation continues to fall without triggering a recession, the Democrat could turn a weakness into a strength.
Biden recently touted his policies as “Bidenomics,” taking credit for falling inflation in a recent statement saying, “Good jobs and lower costs: that’s Bidenomics in action.”
The WSJ survey shows that while a majority of economists still think a recession is likely next year, they view an economic contraction as smaller and later than previous forecasts.
The forecasters said GDP would rise 1 percent in 2023 as measured from the fourth quarter of a year earlier, double the previous forecast of 0.5 percent.
It comes after the latest Consumer Price Index report showed headline annual inflation was 3 percent in June, after falling for 12 consecutive months from last summer’s peak of 9.1 percent, a 40-year high.
The labor market has also remained stable, with the unemployment rate in June at 3.6 percent near its five-decade low and the number of employed workers growing by 209,000 per month.
With inflationary pressures easing significantly, ordinary Americans are also becoming more optimistic about the economic outlook.
Consumer confidence reached its highest level in nearly two years in July, new data showed on Friday.
The annual inflation rate of 3 percent is a sharp drop from last June’s peak of 9.1 percent
The economy continued to add jobs at a robust pace in the first half of the year
The University of Michigan report showed that the consumer confidence index rose 12.7 percent this month to 72.6, the highest reading since September 2021. Economists had tentatively forecast a reading of 65.5.
Joanne Hsu, the director of the Surveys of Consumers at the University of Michigan, attributed the rise in sentiment to “the continued slowdown in inflation and stability in labor markets.”
All demographics, with the exception of lower-income consumers, saw sentiment increase.
Wall Street has also become more optimistic this year. The benchmark S&P 500 is up 17.8 percent from January and entered a new bull market last month, after gaining more than 20 percent from its recent low of last October.
Some of the largest US banks reported financial results last week showing positive signs for the economy, including signs of life in mergers and acquisitions, a company that has been in the doldrums.
“The US economy remains resilient,” said JPMorgan CEO Jamie Dimon. But he added that consumers are “slowly using up their cash buffers” after building up their savings during the pandemic.
Investors are now awaiting results from the so-called “Magnificent Seven” of tech megacaps in the coming weeks: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta.
Wall Street has also become more optimistic this year. The benchmark S&P 500 is up 17.8 percent from January and entered a new bull market last month
Economists will also be watching two key factors to gauge the prospects for a recession: how steadily inflation continues to fall and how quickly the Fed takes action to pause or cut interest rates.
Economists polled by the Wall Street Journal expect the central Fed’s interest rate to peak at 5.4 percent in December, a sharp rise from the 5 percent forecast in the latest survey.
That forecast prediction implies at least one more 25 basis point hike by the Fed. Bond markets are pricing in a 93 percent chance that the Fed will raise rates by a quarter point at its next meeting on July 25-26.
Economists think a hike at the next Fed meeting could mark the finale of the US Federal Reserve’s fastest monetary tightening cycle since the 1980s.
The Fed, which has raised its key interest rate by 500 basis points since March 2022, skipped a rate hike at its policy meeting last month.
“The inflation pipeline is clearing,” Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina, told Reuters.
“Investors should expect the Fed to acknowledge the continued improvement in price dynamics in the domestic economy at its upcoming meeting.”