The US economy will slide into recession next year, according to almost 70 percent of the leading academic economists surveyed by the Financial Times.
The latest survey, conducted in partnership with the Initiative on Global Markets at the University of Chicago’s Booth School of Business, points to mounting headwinds for the world’s largest economy after one of the fastest recoveries in history as the Federal Reserve their efforts to contain it amplifies the highest inflation in about 40 years.
The US Federal Reserve has already embarked on one of the fastest tightening cycles in decades. Since March it has raised its key interest rate by 0.75 percentage points from almost zero.
The Federal Open Market Committee meets again Tuesday for a two-day policy meeting where officials are expected to implement the first consecutive half-point rate hike since 1994 and signal a continuation of that pace through at least September.
Almost 40 percent of the 49 respondents expect the National Bureau of Economic Research — the arbiter of when recessions start and end — to declare a recession in the first or second quarter of 2023. A third believe this call will be delayed until the second half of next year.
The NBER characterizes a recession as a “substantial decline in economic activity that is widespread across the economy and lasts longer than a few months.” Only one economist predicted a recession in 2022, with the majority forecasting monthly job growth averaging 200,000 to 300,000 for the remainder of the year. According to the median estimate for December, the unemployment rate should stabilize at 3.7 percent.
The survey results, collected between June 6th and 9th, contradict the Fed’s stance that it can dampen demand without causing significant economic pain. The Fed is forecasting that in the red-hot US job market, as interest rates rise, employers will choose to cut historically high job vacancies rather than lay off staff, which in turn will cool wage growth.
Fed Chair Jay Powell has acknowledged that the Fed’s efforts to dampen inflation could cause “some pain” and result in a “soft” landing that would see the unemployment rate rise “a few ticks”. However, many of the economists surveyed are concerned about a less favorable outcome given the severity of the inflationary situation and the fact that monetary policy will soon have to switch to much tighter settings to address it.
“This is not a plane landing on a normal runway. This is an airplane landing on a tightrope, and the winds are blowing,” said Tara Sinclair, an economist at George Washington University. “The idea that we’re going to cut incomes just enough and cut spending just enough to bring prices back to the Fed’s 2 percent target is unrealistic.”
Compared to the February survey, more economists now think core inflation, as measured by the Personal Consumption Expenditure Index, will be above 3 percent by the end of 2023. Of June respondents, 12 percent thought the outcome was “very likely,” up from just 4 percent earlier this year. The proportion of economists surveyed who considered this level “unlikely” over the same period has almost halved since then.
Geopolitical tensions and the likely accompanying rise in energy costs were overwhelmingly cited as a factor potentially maintaining upward pressure on inflation over the next 12 months, followed by continued supply chain disruptions. At the end of the year, the median estimate for core inflation was 4.3 percent.
Jonathan Wright, an economist at Johns Hopkins University who helped design the survey, said the notable pessimism about inflation and growth has stagflationary undertones, although he noted that circumstances are very different from the 1970s, when the term embodied a “much more uncomfortable mix of high inflation and recession”.
Almost 40 percent of economists warned that the Fed would not be able to control inflation if it only raised the federal funds rate to 2.8 percent by the end of the year. This would require a half-point rate hike at each of the next three central bank meetings in June, July and September, before being tapered back to its more typical quarter-point cadence for the final two meetings of 2022.
Few respondents expect the Fed to hike 0.75 percentage points.
Further rate hikes are also likely well into next year, says Christiane Baumeister, a professor at the University of Notre Dame, who believes the Fed could raise interest rates to as much as 4 percent in 2023. That’s just above the level of the majority of economists surveyed who believe this will be the culmination of this tightening cycle.
Dean Croushore, who was an economist at the Fed’s Philadelphia branch for 14 years, warned that the central bank may eventually need to raise interest rates to around 5 percent to contain a problem he believed was largely due to it was due to the fact that the Fed had “waited far too long”.
“It’s always difficult to bring inflation down once you’ve let it out of the bottle,” said Croushore, who now teaches at the University of Richmond. “If they accelerated rate hikes just a little bit more, it might create a little financial volatility in the near term, but they might be better off not having to do as much later.”