Recession risks are fading, business economists say, but political tensions pose threat to economy

WASHINGTON — Only a quarter of business economists and analysts expect the United States to enter a recession this year. And any downturn would likely be the result of an external shock – such as a conflict involving China – rather than domestic economic factors such as higher interest rates.

But respondents to a National Association of Business Economics survey released Monday still expect annual inflation to exceed 2.5% through 2024 — above the Federal Reserve’s target of 2%.

A year ago, most forecasters expected the U.S. economy — the world’s largest — to slide into recession as the Fed raised rates to counter the burst of inflation that began in 2021. The Fed has raised its benchmark interest rate eleven times from March 2022 to July. 2023, taking it to the highest level in more than two decades.

Inflation fell from a peak of 9.1% in June 2022 to 3.4% in December. But the economy continued to grow unexpectedly and employers continued to hire and resist layoffs despite higher borrowing costs.

The combination of falling inflation and resilient growth has raised hopes – reflected in the NABE survey – that the Fed can engineer a so-called soft landing: conquering inflation without the pain of a recession.

“Panelists are more optimistic about the prospects for the domestic economy,” said Sam Khater, chief economist at mortgage giant Freddie Mac and chairman of the association’s economic policy research committee.

The Fed has stopped raising rates and has indicated that it expects to cut rates three times this year.

But a growing share of business forecasters worry that the Fed is keeping rates unnecessarily high: 21% of the NABE survey called the Fed’s policy “too restrictive,” up from 14% who expressed this view in August. Yet 70% say the Fed has it “about right.”

What worries respondents is the chances of a conflict between China and Taiwan, even if not an outright war: 63% consider such an outcome to be at least a “moderate likelihood.” Likewise, 97% see at least a moderate likelihood of conflict. in the Middle East will push oil prices above $90 a barrel (from about $77 now) and disrupt global shipping.

Another 85% are concerned about political instability in the United States before or after the November 5 presidential election.

Respondents are also increasingly concerned about America’s public finances, with 57% saying fiscal policy – ​​which has created a huge gap between what the government spends and what it collects in taxes – needs to be more disciplined, up from 54% in August.

They say the main objectives of government budget policy should be to promote medium- to long-term growth (cited by 45% of respondents) and to reduce the federal deficit and debt (42%). Coming in a distant third – and mentioned by 7% – is the goal of reducing income inequality.