Recession expectations in the US economy have decreased

Optimism about the U.S. economy is rising due to declining inflation, expectations that the Federal Reserve has come to an end in its interest rate hike cycle, strong labor market performance, and economic growth.

Economists now think the recession will be over, the Federal Reserve will stop raising interest rates, and inflation will continue to fall.

According to the latest results from the Wall Street Journal’s quarterly survey, business and academic leaders reduced the probability of a recession over the next year from 54 percent to 48 percent. Thus, the probability of recession fell below 50 percent for the first time since the middle of last year.

“The likelihood of a U.S. recession continues to decline as banking turmoil eases, strong labor market flexibility and rising real incomes support consumer demand,” BMO Global economists Doug Porter and Scott Anderson.

GROWTH EXPECTATIONS INCREASE FOR 2023

Economists also changed their growth expectations. Consequently, the 1 percent growth expectation in the fourth quarter of 2023 was raised to 2.2 percent, while forecasts for next year were lowered to 1 percent from 1.3 percent in the survey. of July.

Economists, who expect the country’s economy to continue growing in 2024 and 2025, expect unemployment rates to rise but remain slightly above 4 percent, which is a historically low level.

While economic growth and job creation are expected to be weak in the first half of 2024, GDP is forecast to rise 0.35 percent annually in the first quarter and 0.6 percent in the second quarter .

Did the Fed stop raising interest rates?

Nearly 60 percent of economists say the current cycle of rate hikes is coming to an end after the Federal Reserve raised the federal funds rate to a 22-year high of 5.25-5.50 percent. hundred. 23 percent expect the final increase to occur in November and 11 percent expect it to occur in December.

About half of economists expect the Federal Reserve to begin cutting interest rates in the second quarter of next year as economic growth slows and the unemployment rate rises from 3.8 percent in September to 4. 3 percent in June.

Taken together, the latest forecasts suggest confidence in the Federal Reserve’s ability to achieve a so-called soft landing, in which inflation falls without a recession. 82 percent of economists believe that the Federal Reserve’s current interest rate target range of 5.25 percent to 5.5 percent will cause inflation to return to the Fed’s 2 percent target in the next few years. next two or three years.

Economists expect inflation, which was 3.7 percent in September, to decline to 2.4 percent by the end of next year and 2.2 percent by the end of 2025.

“In recent months, it is undeniable that the soft landing argument has strengthened,” Deutsche Bank economists Brett Ryan and Matthew Luzzetti said in the survey. “However, negative aspects such as depleting savings, tightening credit conditions, slowing income growth and the return of student debt payments will be felt more clearly next year,” they added.

THE DANGER OF THE ISRAEL-HAMAS CONFLICT IN THE ECONOMY

Economists also warned in the survey that recent developments, such as the impact of the conflict between Israel and Hamas on energy prices, may cloud the outlook for the U.S. economy in the coming months.

About 81 percent of economists said bond yields hitting their highest level since 2007 made a recession more likely, but not enough to offset other factors that make a recession less likely. Economists also expect yields to decline in the coming months.