Forecasters have slightly improved their outlook for the economy and labour market, and a recession is now expected to begin later in 2023 than previously thought.
According to a panel of 48 forecasters polled by the National Association of Business Economics from February 3-10, 58% still believe there is a greater than 50% chance of a downturn in the next 12 months (NABE). This is roughly the same proportion as in a December survey.
However, only 28% believe the slump will begin in the current quarter, compared to 52% in December. Instead, 33% believe a recession will begin in the second quarter, while 21% believe it will begin in the third quarter.
The January job gains of 517,000 and the drop in the unemployment rate to 3.4%, a 54-year low, are major reasons for the improved forecast. The Labor Department’s jobs report, released earlier this month, depicted a more vibrant labour market than had been captured by the steady slowing of monthly payroll gains late last year to a still robust 300,000 or so.
What will the job market be like in 2023?
According to their median forecast, NABE forecasters now expect average monthly job gains of 256,000 in the current quarter, up from 103,000 in December.
They also forecast average monthly job gains of 102,000 in 2023, up from 76,000 in December, and unemployment of 4.3% by the fourth quarter, down from 4.5% previously forecast.
Even though most economists believe the country will enter a mild recession this year, they believe unemployment will peak at 4.9%, which is still a historically low level.
Is consumer spending on the rise?
Job growth has boosted Americans’ income and spending, which accounts for 70% of economic activity. The Commerce Department reported Friday that consumption increased 1.8% in January, the largest increase in nearly two years, despite high inflation, rising interest rates, and a shrinking reserve of the extra cash amassed by US households early in the pandemic.
“I believe the economy has proven to be more resilient than many economists anticipated,” says Ken Simonson, a NABE survey analyst and chief economist of the Associated General Contractors, a construction trade group.
According to many experts, low household debt, pandemic-related savings, and a strong labour market have helped Americans cope with the higher costs of inflation and rising interest rates.
What will the consequences of Fed rate hikes be?
To be sure, growth is expected to slow as the Federal Reserve’s most aggressive interest rate hike campaign since the 1980s, aimed at lowering inflation, reduces consumer and business spending. Many economists believe the policy will precipitate a recession this year.
However, based on the change in average GDP over the four quarters compared to 2022, NABE forecasters expect the economy to grow 0.8% in 2023. This is down from 2.1% last year but up from 0.5% in December.
Inflation has been falling rapidly in recent months, and forecasters predicted that the consumer price index (CPI) would rise 3% in 2023, down from 3.1% in December and 6.5% last year.
Nonetheless, they expect the Fed’s key interest rate to end 2023 in a range of 4.75% to 5%, which is higher than the 4.5% to 4.75% range they previously predicted but lower than the 5% to 5.25% range projected by Fed officials.
What is the greatest economic risk?
Excessive Fed hikes are viewed as the greatest risk to the economy by 51% of economists, down from 65% in December. A small but growing proportion now sees an escalating conflict in Ukraine as the greatest risk.
The NABE survey, on the other hand, was conducted before recent reports showed inflation rising faster than expected in January, a development that could prompt the Fed to raise interest rates even further.