Economists downgrade recession odds because of one crucial factor
Economists are having a change of heart about the imminence of recession in the U.S., according to a new survey conducted by The Wall Street Journal.
The Journal’s panel of more than 70 economists has lowered the probability of a recession in the next 12 months to 48%, down from 54% in July. It’s the first time recession odds have fallen below 50% since mid-2022.
“The probability of recession continues to recede in the U.S. as the banking turmoil subsides and strong labor market resilience and rising real incomes support consumer demand,” Bank of Montreal economists Doug Porter and Scott Anderson said in the Journal’s survey.
Granted, “only” a 48% chance of recession isn’t great; economists are effectively saying that the chance of a downtrend is a coin flip. But according to these experts, there’s a reason to be optimistic.
The Fed is done
The panel’s optimism is driven by the belief that the Fed is done raising interest rates, which should pave the way for a “soft landing” officials have longed for.
As the Brookings Institute explains, a soft landing is the “Goldilocks porridge” for central bankers—the economy is neither too hot (inflationary) nor too cold (approaching a recession).
“Over the past several months, the case for a soft landing has undeniably strengthened,” Deutsche Bank economists Brett Ryan and Matthew Luzzetti told the Journal.
Fed officials have voted for 11 rate hikes since early 2022 to help bring down a 40-year inflation spike. Higher interest rates have handcuffed homebuyers and raised the cost of borrowing on auto loans, personal lines of credit, and credit cards.
Yet, the economy has been surprisingly resilient, with household spending and jobs continuing to grow. Perhaps most shocking is the latest estimate from the Atlanta Fed for 5.1% GDP growth in the third quarter of 2023.
Despite this seemingly positive outlook, economists are still concerned about “headwinds” facing the average American consumer. Depending on the strength of these headwinds, a recession may still be in the cards.
Not out of the woods yet
Depleted pandemic savings, tighter credit conditions, slower wage growth, and the end of student loan forbearance were all issues that economists flagged heading into next year.
That strong job market everyone is talking about? It’s mostly driven by part-time workers and people holding multiple jobs, as the labor market has shed 700,000 full-time positions over the past three months.
Beyond consumer issues, not everyone is convinced that the Fed is done raising interest rates. While Inflation has come down over the past year, it still remains too “sticky” for policymakers' taste.
“When everyone expects a soft landing, brace for impact. That’s the lesson of recent economic history—and it’s an uncomfortable one for the U.S. right now,” said Bloomberg economists Anna Wong and Tom Orlik.