Economists Now Expect a Recession, Job Losses by Next Year

The US will enter a recession over the next 12 months as the Federal Reserve struggles to stem persistently high inflation, the economy shrinks and employers cut jobs in response, according to the Wall Street Journal’s latest poll of economists.

Economists put the probability of a recession over the next 12 months on average at 63%, up from 49% in the July survey. It’s the first time since July 2020 that the survey puts the probability above 50% after the last brief but severe recession.

Their forecasts for 2023 are becoming increasingly bleak. Economists now expect gross domestic product to fall in the first two quarters of the year, a downgrade from the last quarterly survey, when they indicated slight growth.

On average, economists are now predicting that GDP will contract by 0.2% annually in the first quarter of 2023 and by 0.1% in the second quarter. In the July survey, they expected a growth rate of 0.8% in the first quarter and 1% growth in the second.

Employers are expected to respond to lower growth and earnings with job cuts in the second and third quarters. Economists expect nonfarm payrolls to fall by an average of 34,000 per month in the second quarter and 38,000 per month in the third quarter. According to the latest survey, they expected employers to add about 65,000 jobs monthly over those two quarters.

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Forecasters have raised their expectations of a recession as they increasingly doubt the Fed can raise rates further to cool inflation without triggering higher unemployment and an economic slowdown. About 58.9% of economists said they believe the Fed will hike interest rates too much and cause unnecessary economic weakness, up from 45.6% in July.

“‘Soft landing’ will likely remain a mythical outcome that never really comes to pass,” said Daniil Manaenkov, an economist at the University of Michigan. A soft landing occurs when the Fed tightens enough monetary policy to reduce inflation without triggering a recession.

“The coming burden of higher interest rates and a stronger dollar is huge and will eat away at about 2.5 percentage points from next year’s GDP growth,” said Aneta Markowska, chief economist at Jefferies LLC. “With that in mind, it’s hard to see how the US can avoid a recession.”

Economists’ average forecasts indicate that they expect a relatively short-lived recession. Of those economists who see a more than 50% chance of a recession next year, their average expectation for the length of a recession was eight months. The average post-war recession lasted 10.2 months.

For 2023 as a whole, they expect economic growth of 0.4% up to the fourth quarter compared to the fourth quarter of the previous year. In 2024 they see economic growth of 1.8%.

Nevertheless, forecasts assume that the labor market will weaken in the coming months and years. They forecast that the unemployment rate, which was 3.5% in September, will rise to 3.7% in December and 4.3% in June 2023. The economists’ average unemployment rate for the end of next year is 4.7%, and they expect it to remain broadly at that level through 2024. While an unemployment rate of 4.7% is historically low and indicative of the current labor shortage, it suggests that the Fed’s efforts to lower inflation will inflict some pain on workers.

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“The Federal Reserve has a choice between the lesser of two evils – take a recession with rising unemployment today, or risk more corrosive and entrenched inflation taking root,” said Diane Swonk of KPMG. “The risks of a misstep are great given the sins that low interest rates have likely overplayed,” she added.

The past few years have been volatile for the US economy as it has faced shocks such as the Covid-19 pandemic and the Russian invasion of Ukraine. In 2019, before the pandemic, the economy grew 2.6%. GDP shrank by 1.5% in 2020 and rebounded strongly in 2021, posting growth of 5.7%. In this year, as consumers and businesses grapple with high inflation and supply chain issues, economists expect the economy to grow by just 0.2%.

Rate hikes by the Fed are likely to further dampen demand for housing next year. Economists expect home prices to fall 2.2% in 2023, as measured by the US Federal Housing Finance Agency’s seasonally adjusted home price index. That would be the first such decline since 2011.

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The Fed has raised its benchmark federal funds rate by 0.75 points at each of its last three meetings, most recently in September, bringing the rate to a range of 3% to 3.25%. Another uncomfortably high inflation read for September should keep the Federal Reserve on track to hike interest rates by 0.75 percentage point at next month’s meeting.

Economists on average expect the Fed to hike interest rates to 4.267% in December, which means at least another 0.5 point hike this month. They expect the federal funds rate to peak at 4.551% in June next year.

Most economists expect the Fed to eventually reverse course and start cutting rates late next year or early 2024. About 30% of economists expect the central bank to cut rates in the fourth quarter of 2023, and 28.3% expect the next rate cut in the first quarter of 2024.

The survey of 66 economists was conducted from October 7th to 11th. Not every economist answered every question.

Write to Harriet Torry at [email protected] or Anthony DeBarros at [email protected]

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