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Recession May Loom, Economists Say

The U.S. will likely enter a recession in the next year, according to a survey of economists conducted this month by The Wall Street Journal (subscription).

What’s going on: “On average, economists put the probability of a recession in the next 12 months at 63%, up from 49% in July’s survey. It is the first time the survey pegged the probability above 50% since July 2020, in the wake of the last short but sharp recession.”

  • Economists also expect gross domestic product to shrink in the first two quarters of 2023, at 0.2% at the annual rate in Q1 and at 0.1% in Q2.

Why it’s important: Employers are expected to respond with job cuts in the second and third quarters of next year, and nonfarm payrolls will likely decline by 34,000 a month, on average, in Q2, and by an average of 38,000 a month in Q3, economists said.

“Soft landing” unlikely: “Forecasters have ratcheted up their expectations for a recession because they increasingly doubt the Fed can keep raising rates to cool inflation without inducing higher unemployment and an economic downturn.”

  • Thus, economists say a “soft landing”—which happens when the Fed tightens policy to a degree that reduces inflation but does not induce recession—is not likely.

Housing fallout: Additional interest-rate increases will slow housing demand in 2023, forecast the economists, who expect home prices to dip 2.2%.
A silver lining: “Economists’ average forecasts suggest that they expect a recession to be relatively short-lived. Of the economists who see a greater than 50% chance of a recession in the next year, their average expectation for the length of a recession was eight months.”

The last word: “While the U.S. economy has been surprisingly resilient, particularly when compared to other markets around the world, the outlook continues to have more downside risks than upside risks,” NAM Chief Economist Chad Moutray said.

  • “The Federal Reserve is adamant about tackling inflation, potentially jeopardizing the ‘soft landing’ it is seeking, and significant geopolitical and economic risks remain, with the global economy slowing materially.”
  • “As a result, the probability of a recession starting in Q4 or in 2023 has risen sharply. The one key factor to watch: the strong labor market and wages, which have remained solid to date. This could keep consumers spending, either averting a recession or lessening the extent of the downturn.”
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