Economists downplayed the risk of a recession as inflation continued to fall

Economists downplayed the risk of a recession as inflation continued to fall

Economists have scaled back their predictions of an impending recession in the U.S., as inflation remains near normal and the labor market remains stable.

A recent Wall Street Journal survey of economists found their average probability forecast of a recession in the next 12 months fell to 54 percent, down from 61 percent in the last two polls in April and January.

While that forecast remains higher than pre-pandemic norms, it represents the biggest percentage-point drop in surveys since August 2020 as the economy begins to recover from lockdown disruptions.

The upbeat economic outlook follows a number of favorable economic indicators, which suggest the Federal Reserve’s interest rate hike could push inflation back to target levels without triggering a painful recession.

If so, it would represent a major political victory for President Joe Biden as he seeks re-election next year, after his administration came under fire last summer when inflation hit a four-decade high.

A recent Wall Street Journal survey of economists found that their forecast for the average chance of a recession in the next 12 months fell from 61 percent to 54 percent.

Biden recently touted his policies as ‘Bidenomics’, taking credit for reducing inflation.

Republicans have hammered Biden on economic issues since taking office, but Democrats could turn weakness into strength if inflation continues to fall without triggering a recession.

Biden has recently referred to his policies as ‘Bidenomics’, taking credit for the fall in inflation in a recent statement, ‘Good jobs and lower costs: That’s how Bidenomics works.’

The WSJ poll shows that while most economists still think a recession is likely next year, they see an economic contraction smaller and later than previously forecast.

Forecasters said GDP would grow 1 percent in 2023, measured from the fourth quarter a year earlier, double the previous forecast of 0.5 percent.

It comes after the latest Consumer Price Index report showed overall annual inflation at 3 percent in June, after last summer’s peak of 9.1 percent, a 12-month fall from a 40-year high.

The job market also remained stable, with the unemployment rate remaining near a five-decade low of 3.6 percent in June, and the number of employed workers increasing by 209,000 in the month.

With inflationary pressures considerably lower, regular Americans are also becoming more optimistic about the economic outlook.

Consumer sentiment reached its highest level in nearly two years in July, new data showed on Friday.

The 3 percent annual inflation rate is a sharp drop from the peak of 9.1 percent seen last June.

The economy continued to add jobs at a strong rate in the first half of the year

The University of Michigan report showed its consumer sentiment index jumped 12.7 percent this month to 72.6, the highest reading since September 2021. Economists had forecast a preliminary reading of 65.5.

Joan Hu, director of the University of Michigan’s Survey of Consumers, attributed the rise in sentiment to ‘the continued slowdown in inflation coupled with stability in the labor market.’

Sentiment increased across all demographic groups except low-income consumers.

Wall Street has also been more optimistic this year. The benchmark S&P 500 has risen 17.8 percent since January, and entered a new bull market last month after gaining more than 20 percent from a recent low last October.

Some of the largest U.S. 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.

JPMorgan Chief Executive Jamie Dimon said, ‘The US economy continues to be resilient. But he added that consumers are ‘slowly using up their cash buffers’ after building up their savings during the pandemic.

Investors are now waiting to hear results next week from the so-called ‘Magnificent Seven’ of tech megacaps: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta.

Wall Street has also been more optimistic this year. The benchmark S&P 500 has risen 17.8 percent since January and entered a new bull market last month.

Economists also look at two key factors to gauge the outlook for a recession: how steadily inflation is falling, and how quickly the Fed moves to freeze or cut interest rates.

Economists polled by the Wall Street Journal expect the midpoint Fed interest rate to peak at 5.4 percent in December, up sharply from the 5 percent forecast in the last survey.

That forecast implies at least another 25-basis-point hike by the Fed. Bond markets are pricing in a 93 percent chance the Fed will hike a quarter point at its next meeting on July 25-26.

Economists believe a hike at the next Fed meeting could be the culmination of the US central bank’s fastest monetary policy tightening cycle since the 1980s.

The Fed, which has raised overnight interest rates by 500 basis points from March 2022, avoided a rate hike at its policy meeting last month.

“The inflation pipeline is clearing,” Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina, told Reuters.

“Investors should expect the Fed to acknowledge continued improvement in price dynamics across the domestic economy at the upcoming meeting.”

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