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A Recession Is No Longer the Consensus

Economists are turning optimistic on the U.S. economy. They now think it will skirt a recession, the Federal Reserve is done raising interest rates and inflation will continue to ease.

In the latest quarterly survey by The Wall Street Journal, business and academic economists lowered the probability of a recession within the next year, from 54% on average in July to a more optimistic 48%. That is the first time they have put the probability below 50% since the middle of last year.The median probability was 50%, in effect a coin flip.“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,” BMO economists Doug Porter and Scott Anderson said in the survey.Fueling the optimism are three key factors: inflation continuing to decline, a Federal Reserve that is done raising interest rates, and a robust labor market and economic growth that have outperformed expectations.Economists on average expect gross domestic product, the value of all the goods and services produced in the country adjusted for inflation, to increase 2.2% in the fourth quarter of 2023 from a year earlier. That is a sharp upward revision from the average 1% growth forecast in the last survey.Economists trimmed their forecast for next year, to 1% from 1.3% in the July survey, but expect the economy to keep growing in 2024 and 2025 and the unemployment rate to rise but hover just above 4%—a historically low level.Economic growth and job creation are expected to be weak in the first half of 2024. Economists predict GDP will increase at an anemic 0.35% annual rate in the first quarter and 0.6% in the second. They expect employers will add 42,500 new jobs a month on average in the first quarter and 16,700 new jobs in the second, a sharp slowdown from the expected 138,800 a month in the final quarter of this year as businesses feel the pinch from high interest rates.Nearly 60% of economists said the Fed is done raising rates in its current cycle of interest-rate increases, after lifting short-term borrowing costs to a 22-year high in July of 5.25% to 5.5%. About 23% expect the final increase to come in November and 11% in December.Roughly half of economists expect the Fed will start cutting rates in the second quarter of next year as economic growth cools, and the unemployment rate—which was 3.8% in September—rises to 4.3% by June.  Still, taken together, the latest forecasts suggest confidence in the Fed’s ability to achieve a so-called soft landing, in which inflation falls without a recession. An overwhelming 82% of economists said the Fed’s current interest-rate target range of 5.25% to 5.5% is restrictive enough to bring inflation back to the Fed’s 2% goal over the next two or three years.Economists expect inflation as measured by the consumer-price index, which was 3.7% in September, to tick down to 2.4% by the end of next year and 2.2% by the end of 2025.“Over the past several months, the case for a soft landing has undeniably strengthened,” said Deutsche Bank economists Brett Ryan and Matthew Luzzetti in the survey. “However, headwinds such as depleted savings, tightening credit conditions, slowing income growth and return of student debt payments will weigh more appreciably over the next year,” they added.Economists give Fed Chair Jerome Powell relatively good grades for his handling of monetary policy. Nearly half gave him a solid B, while 20% gave him an A, and 20% a C. Their main criticism was Powell’s view that inflation would prove transitory in 2021, and as a result the Fed’s slow start to increasing borrowing costs.The economic picture isn’t all rosy. Economists warned in the survey that recent developments could cast shadows on the U.S. economy’s prospects in the coming months, such as the impact of the conflict between Israel and Hamas on energy prices. Some 81% of economists also said the recent run-up in bond yields to their highest levels since 2007 increased the probability of a recession, though not by enough to offset other factors making such a downturn less likely.Economists also expect yields will ease in the coming months. On average, they expect the 10-year Treasury yield to close at 4.47% at the end of this year, and fall to 4.16% by June 30 of next year. The 10-year Treasury yield closed at 4.63% on Friday, down from 4.783% a week earlier. The survey of 65 economists was conducted Oct. 6-11. Not every economist answered every question.

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