Economists have scaled back their forecasts of an impending US recession as inflation eases closer to normal while the job market remains resilient.
The Wall Street Journal’s latest poll of economists found their median probability forecast of a recession over the next 12 months has fallen to 54 percent, down from 61 percent in the last two polls in April and January.
While this forecast remains high compared to pre-pandemic norms, it represents the largest percentage drop between surveys since August 2020, when the economy began to recover from lockdown disruptions.
The improving economic outlook follows a raft of favorable economic indicators suggesting that Federal Reserve rate hikes could bring inflation back to target levels without triggering a painful recession.
If so, it would be a major political victory for President Joe Biden, who is seeking re-election next year after his administration suffered severe criticism last summer when inflation hit a four-decade high.
The Wall Street Journal’s latest poll of economists found their average probability forecast for a recession over the next 12 months has fallen from 61 percent to 54 percent
Biden recently dubbed his policies “bidenomics,” crediting himself with falling inflation
Republicans have pressured Biden on economic issues since he took office, but if inflation keeps falling without triggering a recession, the Democrat could turn a weakness into a strength.
Biden recently touted his policies as “bidenomics,” citing falling inflation in a recent statement: “Good jobs and lower costs: This is bidenomics in action.”
The WSJ poll shows that while a majority of economists still think a recession is likely next year, they see an economic slowdown as weaker and later than previously forecast.
The forecasters said that GDP in 2023 would increase by 1 percent compared to the fourth quarter of last year, double the previous forecast of 0.5 percent.
This comes after the latest CPI report showed that the annual headline inflation rate stood at 3 percent in June, after falling for 12 straight months below last summer’s peak of 9.1 percent, a 40-year high.
The job market also remained resilient, with the unemployment rate hovering near a five-decade low at 3.6 percent in June and the number of employed workers rising by 209,000 month-on-month.
As inflationary pressures ease significantly, Americans are also becoming more optimistic about the economic outlook.
Consumer sentiment rose to the highest level in almost two years in July, new data showed on Friday.
The annual inflation rate of 3 percent is a sharp drop from a peak of 9.1 percent last June
The economy continued to create a lot of new jobs in the first half of the year
The University of Michigan report showed the consumer sentiment index rose 12.7 percent this month to 72.6, the highest since September 2021. Economists had forecast a preliminary reading of 65.5.
Joanne Hsu, director of consumer surveys at the University of Michigan, attributed the uptick in sentiment “to continued moderation in inflation and resilience in job markets.”
Sentiment improved among all segments of the population, with the exception of lower-income consumers.
Wall Street has also become more optimistic this year. The benchmark S&P 500 is up 17.8 percent since January and entered a new bull market last month after gaining more than 20 percent from the recent low last October.
Some of the largest US banks reported financial results last week with positive signs for the economy, including signs of life in mergers and acquisitions, a business that has been in the doldrums.
“The US economy remains resilient,” said JPMorgan CEO Jamie Dimon. However, he added that consumers are “slowly depleting their cash reserves” after building up their savings during the pandemic.
Investors are now waiting to hear the results of 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 since January and entered a new bull market last month
Economists will also monitor two key factors to gauge the prospects for a recession: how steadily inflation continues to fall and how quickly the Fed pauses or cuts interest rates.
Economists polled by the Wall Street Journal expect the Fed’s median interest rate to peak at 5.4 percent in December, up sharply from the 5 percent forecast in the last survey.
This forecast implies at least another 25 basis point rate hike by the Fed. Bond markets are pricing in a 93 percent chance that the Fed will hike rates by a quarter point at its next meeting on July 25-26.
Economists believe a rate hike at the next Fed meeting could mark the finale of the Federal Reserve’s fastest monetary tightening cycle since the 1980s.
The Fed, which has raised its federal funds rate by 500 basis points since March 2022, refrained from raising interest rates at its policy meeting last month.
“The inflation pipeline is clearing up,” Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina, told Portal.
“Investors should expect the Fed to acknowledge the ongoing improvement in price dynamics across the domestic economy at the upcoming meeting.”