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U.S. Economy Outlook Brightens as Recession Fears Diminish

Sara Montes de Oca

Economists' perspective on the U.S. economy is increasingly hopeful. Their latest predictions indicate that the economy will likely avoid a recession. Additionally, expectations are that the Federal Reserve will halt further interest rate hikes and inflation will keep subsiding.


A recent Wall Street Journal survey of business and academic economists revealed a drop in the perceived risk of a recession in the next 12 months: down from 54% in July to 48%. This marks the first time since last year that the probability has been below the halfway mark, with the median risk standing at 50%.


Doug Porter and Scott Anderson, economists at BMO, attributed this positive shift to the resolution of banking issues and a resilient labor market which, combined with increasing real incomes, has bolstered consumer demand.


Three central factors are driving this optimism:

  1. A continuous dip in inflation.

  2. The Federal Reserve's decision to stop interest rate hikes.

  3. A sturdy labor market and economic growth exceeding prior predictions.

In terms of the Gross Domestic Product (GDP), economists now forecast a 2.2% rise in Q4 2023, a marked improvement from their previous 1% growth estimate.


While projections for 2024's growth have been adjusted slightly down to 1% (from 1.3% in July), economists maintain a positive outlook for 2025, expecting the unemployment rate to stay slightly above the 4% mark, a rate that's historically low.


However, the beginning of 2024 might witness tepid economic growth and job generation. The GDP is predicted to see a slow 0.35% annual growth in Q1 and 0.6% in Q2. Job additions are expected to decelerate, with an average of 42,500 new jobs in Q1 and 16,700 in Q2, considerably down from the anticipated 138,800 per month in Q4 2023.


Close to 60% of surveyed economists believe that the Federal Reserve has wrapped up its current phase of interest rate increases. They highlighted the Fed's move in July, raising short-term borrowing costs to a peak not seen in over two decades, between 5.25% to 5.5%.


Many anticipate the Federal Reserve will commence rate reductions by mid-2024 as the economy slows and unemployment edges up from 3.8% (as of September) to an expected 4.3% by June.


These projections collectively reflect faith in the Federal Reserve's capacity to balance inflation and avoid a recession. A vast majority (82%) of economists feel that the present interest-rate range is sufficient to revert inflation to the Fed's 2% objective in the next few years.


In terms of inflation, measured by the consumer-price index (which stood at 3.7% in September), economists forecast a drop to 2.4% by end of 2024 and 2.2% by 2025.


Deutsche Bank economists, Brett Ryan and Matthew Luzzetti, noted in the survey that while the likelihood of a balanced economic slowdown has grown, challenges such as strained savings, stringent credit conditions, and the reinstatement of student loan repayments could pose threats in the coming year.


Regarding Federal Reserve Chair Jerome Powell's management of monetary policy, the verdict was generally positive, with 50% of economists grading him a 'B', 20% awarding an 'A', and another 20% giving a 'C'. Some criticism was directed towards Powell's 2021 stance on inflation being temporary, leading to a delayed response in adjusting borrowing costs.


However, the overall economic forecast isn't entirely optimistic. The survey highlighted potential obstacles like the Israel-Hamas conflict influencing energy prices. Additionally, 81% of the economists voiced concerns over the recent surge in bond yields, which could raise the risk of a recession.


The consensus among economists is that these yields will recede soon. They predict the 10-year Treasury yield, which was at 4.63% recently, to decline to 4.16% by mid-2024.

This comprehensive survey, conducted between Oct. 6-11, saw the participation of 65 economists.

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