The consensus is no longer that a recession is imminent

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By georgeskef

In a WSJ survey economists say Fed has finished raising interest rates and that recession probability is below 50%

The U.S. economic outlook is improving. Now they think the economy will avoid a recession. The Federal Reserve has stopped increasing interest rates. Inflation will continue to decrease.

In The Wall Street Journal’s most recent quarterly survey, academic and business economists reduced the probability of recession in the coming year from an average 54% in July, to a more positive 48%. This is the first time since mid-last year that they’ve put the probability of a recession below 50%.

In effect, the median probability was 50%.

In a survey, BMO economists Doug Porter & Scott Anderson stated that “the probability of recession is continuing to recede as the banking crisis subsides” and that the strong labor market and rising real wages support consumer demand.

Three key factors are fueling optimism: the continued decline of inflation; a Federal Reserve no longer raising interest rates; and a strong labor market, with economic growth exceeding expectations.

The average economist expects the gross domestic product (the value of all goods and services produced by the country, adjusted for inflation) to rise 2.2% from the previous year in the fourth quarter 2023. This is a significant upward revision to the 1% average growth forecast from the previous survey.

The survey of economists in July showed that they had reduced their predictions for the next year to just 1%, down from 1.3%. However, the experts expect the economy will continue to grow in 2024 and in 2025, and the unemployment rate will rise, but only slightly above 4%, a historically low level.

In the first half 2024, economic growth and job creation will be slow. Economists expect GDP to increase at a meager 0.35% rate annually in the first and second quarters. In the first quarter, they expect employers to add an average of 42,500 jobs per month. This is a significant slowdown from the 138,800 jobs expected in the fourth quarter as businesses felt the pinch due to high interest rates.

Nearly 60% said that the Fed has finished raising interest rates in this current cycle. In July , short-term borrowing cost reached a high of 22 years between 5.25% and 5.5%. Around 23% of economists expect the final rate increase to be in November, and 11% in Decembre.

The Fed is expected to start cutting rates by the second quarter next year, as the economy slows down and unemployment rises.

Taken together, however, the most recent forecasts show confidence in the Fed’s ability to achieve a soft landing in which inflation drops without a recession. Eighty-two percent of economists believe that the Fed’s current target interest rate range of 5.25% to 5.50% is restrictive enough to keep inflation at the Fed’s goal of 2% over the next two to three years.

The consumer price index was at 3.7% in September. Economists predict that the inflation rate, as measured by this index, will drop to 2.4% next year, and to 2.2% by 2025.

In the survey, Brett Ryan and Matthew Luzzetti of Deutsche Bank said that the case for a softer landing had unquestionably become stronger over the past few months. They added that “headwinds like depleted savings and tightening credit, as well as slowing income growth, and the return of student loan payments, will be more noticeable over the next 12 months.”

Economists have given Fed Chair Jerome Powell a relatively high grade for his handling of the monetary policy. Nearly half of economists gave Powell a solid B. 20% gave Powell an A and 20% gave Powell a C. They criticized Powell for his view that inflation will be temporary in 2021 and the Fed’s gradual increase in borrowing costs.

The economic outlook isn’t rosy. In the survey, economists warned that recent events could have a negative impact on the U.S. economic prospects in the months to come. For example, the impact of the conflict involving Israel and Hamas on energy prices.

81% of economists said that the recent rise in bond yields, to their highest level since 2007, increased the likelihood of a recession. However, this increase was not enough to offset the other factors which make a downturn more likely.

Economists expect that yields will also ease in the next few months. They expect that the 10-year Treasury will close on average at 4.47% by the end of the year and then fall to 4.16% at June 30 next year. The 10-year Treasury closed Friday at 4.63%, down from 4.783% one week earlier.

A survey of 65 economists took place between October 6 and 11. The survey of 65 economists was conducted Oct. 6-11.