Economists' views on the US economy have become optimistic. They now believe that the United States will avoid an economic recession, the Federal Reserve has completed interest rate hikes, and inflation will continue to ease.
In the latest quarterly survey by The Wall Street Journal, business and academic economists have lowered their expectations for the probability of a US economic recession next year, from an average of 54% in July to a more optimistic 48%. This is the first time since the middle of last year that their expectations for this probability have dropped below 50%.
BMO economists Doug Porter and Scott Anderson said in a survey: "The likelihood of a US economic recession continues to decrease as banking turmoil subsides, the labor market has strong resilience, and rising real income supports consumer demand
There are three key factors contributing to this optimistic sentiment: continued decline in inflation, end of interest rate hikes by the Federal Reserve, and strong and better than expected labor market and economic growth.
Economists predict on average that the inflation adjusted gross domestic product (GDP) of the United States in the fourth quarter of 2023 will increase by 2.2% compared to the same period last year. This is a significant increase from the average expected 1% increase in the previous survey. GDP refers to the value of all goods and services produced by a country.
Economists' expectations for economic growth next year have decreased from 1.3% in the July survey to 1%, but they expect the US economy to maintain growth in 2024 and 2025, with unemployment rates rising but hovering slightly above the historical low of 4%.
It is expected that economic growth and job creation will be weak in the first half of 2024. Economists predict that GDP will only grow at an annualized rate of 0.35% in the first quarter of next year, and is expected to grow by 0.6% in the second quarter. They expect that as companies feel the pressure of high interest rates, employers will add an average of 42500 new jobs per month in the first quarter of next year, and 16700 new jobs in the second quarter, far below the expected monthly increase of 138800 in the fourth quarter of this year.
Nearly 60% of surveyed economists believe that the current rate hike cycle has come to an end after the Federal Reserve raised short-term borrowing costs to a 22-year high of 5.25-5.5% in July. About 23% of economists expect the last rate hike to occur in November, while 11% expect it to occur in December.
About half of economists expect that as economic growth cools, the Federal Reserve will start cutting interest rates in the second quarter of next year, and the unemployment rate will rise to 4.3% by June next year; The unemployment rate in September this year was 3.8%.
However, overall, the latest predictions indicate that people are confident in the Fed's ability to achieve a soft landing in the economy; A soft landing refers to achieving a decrease in inflation without triggering an economic recession. 82% of surveyed economists stated that the Federal Reserve's current interest rate target range of 5.25% to 5.5% is sufficiently restrictive to bring inflation back to the Fed's target level of 2% in the next two to three years.
Economists predict that the inflation rate measured by CPI will drop to 2.4% by the end of next year and 2.2% by the end of 2025; The inflation rate was 3.7% in September this year.
The likelihood of an economic soft landing has undoubtedly increased in the past few months, "Deutsche Bank economists Brett Ryan and Matthew Luzzti said in this survey report. But unfavorable factors such as depleted savings, tightening credit conditions, slowing income growth, and restarting student loan repayments will have a more significant impact in the coming year, "they added.
Economists rate the handling of monetary policy by Federal Reserve Chairman Jerome Powell as high. Nearly half of the surveyed economists gave him a "B" rating, 20% gave him an "A" rating, and 20% gave him a "C" rating. They mainly criticized Powell for believing that inflation would prove temporary in 2021, which is why the Federal Reserve has been slow to start raising borrowing costs.
The economic situation in the United States is not very good. Economists warned in the survey that recent developments may cast a shadow on the prospects of the US economy in the coming months, such as the impact of the conflict between Israel and Hamas on energy prices.
About 81% of surveyed economists also stated that bond yields have recently risen to their highest level since 2007, increasing the likelihood of an economic recession, and this increase in yields is not enough to offset other factors that reduce the likelihood of an economic recession.
Economists also expect yields to decline in the coming months. On average, they expect that the yield of the 10-year US treasury bond bond will close at 4.47% at the end of this year, and will drop to 4.16% before June 30 next year. The yield on the 10-year US treasury bond bond closed at 4.63% on Friday, down from 4.783% a week ago.
This survey of 65 economists was conducted from October 6th to 11th. Not every economist has answered all the questions.