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U.S. Economy Dodges Recession Fears Amid Optimistic Forecasts and Policy Shifts

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As the year draws to a close, the U.S. economy finds itself on more stable footing than previously anticipated, according to a recent Wall Street Journal survey of economists. Amid declining inflation rates, a Federal Reserve that has halted its interest rate hikes, and a labor market that continues to outperform, the economic outlook appears increasingly favorable. This article unpacks the key findings of the survey and their implications for market participants.

Key Points

  • Economists revise the probability of a U.S. recession downward, from 54% in July to 48% in October.
  • Factors such as declining inflation, a halt in Federal Reserve rate hikes, and a resilient labor market fuel optimism.
  • GDP is expected to grow by 2.2% in Q4 2023, a significant upward revision from earlier forecasts.
  • Despite some economic headwinds, the majority of economists believe the Federal Reserve has set the stage for a “soft landing.”

Recession Probability: A Downward Trend

The Wall Street Journal’s latest quarterly survey reveals that economists have lowered the average probability of a recession within the next year to 48%, down from 54% in July. This marks the first time since last year that the figure has dipped below the 50% threshold. According to BMO economists Doug Porter and Scott Anderson, the receding probability is attributed to a subsiding banking turmoil and a strong labor market that continues to bolster consumer demand.

Key Economic Indicators: A Mixed Bag

Economists now expect the U.S. GDP to grow by 2.2% in the fourth quarter of 2023, a sharp upward revision from the 1% growth forecast in the previous survey. However, they have trimmed their growth expectations for next year to 1%, down from 1.3% in July. Despite this, the unemployment rate is expected to remain historically low, hovering just above 4%.

Monetary Policy: A Pause in Rate Hikes

Nearly 60% of economists believe that the Federal Reserve has concluded its current cycle of interest rate increases, after raising short-term borrowing costs to between 5.25% and 5.5% in July. About half expect the Fed to start cutting rates by the second quarter of next year as economic growth cools and the unemployment rate rises to 4.3% by June.

Inflation Outlook: A Gradual Decline

Inflation, as measured by the consumer-price index, is expected to decline to 2.4% by the end of next year and further to 2.2% by the end of 2025. An overwhelming 82% of economists believe that the Federal Reserve’s current interest rate target is restrictive enough to bring inflation back to its 2% goal within the next two to three years.

Conclusion

The latest economic forecasts suggest a growing confidence in the U.S. economy’s ability to achieve a “soft landing,” where inflation falls without leading to a recession. However, economists caution that external factors, such as geopolitical tensions and fluctuating bond yields, could still pose risks. As we move into a new year, vigilance and a nuanced approach to both short-term data and long-term policy implications will be crucial for market participants.

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