Economists surveyed by The Wall Street Journal this month put the likelihood of the economy going into recession on average at 28% over the next 12 months, up from 18% in January and just 13% a year ago.
“The risk of a recession due to the chain of supply shocks across the economy is increasing as the Fed raises rates to address inflation,” said Joe Brusuelas, chief economist at RSM US LLP.
Economists have slashed the growth forecast for this year. On average they see inflation-adjusted GDP growing 2.6% in the fourth quarter of 2022 compared to a year earlier, a full percentage point lower than the average forecast six months ago, though still with an average annual average annual growth rate of 2.2%. higher than the growth rate. A decade before the pandemic.
The threat of a recession with dangerously high inflation, which reached 7.9% in February, captures the Fed’s balancing act: It is attempting to cool the economy to reduce inflation, but not so much. This promotes a pullback in spending and growth. Unemployment.
The latest bearish outlook is slightly lower than the 34.8% peak of the previous expansion in September 2019. At the time, growth slowed in response to the previous year’s hike in the Fed rate and a trade war between the US and China. Months ago it began its first rate-cutting cycle since 2008.
In the absence of the pandemic, whether a recession would have followed cannot be known. In August 2007, economists expected a recession reached the same level, which was followed by a recession. But when it reached the same level in August 2011, the economy continued to grow.
Last month, the central bank raised its benchmark rate by a quarter point and posted six more hikes by the end of the year, the most aggressive pace in more than 15 years. About 84% of the economists polled said they expect the Fed to increase rates by half a point in early May. Over 57% see two or more such increases by the end of 2022.
The median economist in the survey projected that the Fed will move the federal funds rate’s midpoint range to 2.125% by the end of 2022, and then 2.875% by December 2023 — close to the Fed’s own projections.
But they also expect inflation to remain very high – reducing to a still-uncomfortable 5.5% by December, predicting an average rate of 7.5% in June 2022. Respondents predict it will drop to 2.9% by the end of 2023, within striking distance of the Fed’s 2% target.
High inflation remains the primary economic risk; It erodes spending power and consumer confidence and invites the Fed to tighten up. Economists differ on the biggest source of inflation risk. A third cited commodity, food and gas prices, while 15% pointed to Russia’s war with Ukraine.
In this camp, Amy Crew Cutts of AC Cutts & Associates LLC expects higher, more persistent inflation than her peers, primarily because its main driver is commodity prices, exacerbated by the war in Ukraine. But although monetary policy has little effect on those prices, she said, distressing levels of overall inflation continue to pressure the Fed to act.
“It is politically unimaginable not to be seen fighting. But the only policy response the Fed has is to tighten,” said Ms. Cutts, who puts the likelihood of a recession over the next 12 months at 70%. “The Fed’s action to curb inflation is sooner rather than later.” Will cause recession. ,
Twenty-seven percent of respondents pointed to wage increases or a tight labor market as the biggest inflation threat.
“The Ukraine crisis will give another boost to inflation in the near term, but the wage-price spiral that has already begun poses a more permanent threat to price stability,” said Philip Mare, senior US strategist at Rabobank. In this type of spiral, workers win higher wages to keep up with rising prices, and those higher wages prompt firms to raise prices further. Mr Mary said that because that process is already underway, the Fed would have to raise rates enough to induce it to break the recession. Inflation dynamic.
Robert Fry, of Robert Fry Economics LLC, puts the odds of a contraction at just 15% over the next 12 months, but raises it to more than 50% within the coming 24 months, and the three-quarters of the current recession is starting. expect to be. in the last quarter of 2023.
“The problem is actually excess demand, which is a result of last year’s fiscal and monetary policies,” he said. “The longer the Fed waits to bring inflation under control, the deeper the recession.”
Recognizing the growing risk of recession, most economists—63%—still think the Fed will be able to rein in inflation without triggering a recession—which economists call a “soft landing.” Unemployment near record lows, steadily rising incomes and relatively low levels of consumer credit are facing hard work.
“There’s still a lot of demand and momentum in the economy,” said Leo Feller, a senior economist at the Anderson School of Management at the University of California, Los Angeles. “Higher interest rates can cut growth by about 4%.” This year -5% to around 2-3%, so we will see a significant slowdown in growth, but a slowdown is unlikely at this point in time.”
The Wall Street Journal’s survey of 65 business, academic and financial forecasters was conducted April 1-5. Not all participants answered each question.