A majority of business economists believe that the U.S. economy will continue to slow and enter a recession next year, but the impact on the labor market may be limited due to recent downturns.
According to the results of a new survey released by the National Association for Business Economics NABE on Monday, 57% of respondents believe that the probability of a recession in 2023 is greater than 50%. A 52% majority of economists believe that the recession will begin in the first quarter of 2023.
The survey, which was conducted November 7 -- 18, pointed out the Federal Reserve's tightening of monetary policy in an effort to tame inflation as the biggest challenge facing the economy. When asked to identify the biggest downside risk to the economy, 65% of respondents said there was too much monetary tightness.
A similar question was asked about the greatest upside risk and 50% of respondents identified the Fed as trying to achieve its desired soft landing by reining in inflation without a severe recession. Economists surveyed were skeptical about the likelihood of a soft landing, with 77% putting the probability of one at 50% or below.
The survey respondents believe that job growth will slow down over the next year, but don't think there will be a contraction in payrolls. The panel expects to see a decline in monthly job gains from an average of 370,000 in 2022 to just 76,000 in 2023, with the smallest gains in the first part of next year. The report on Friday showed that employers added 263,000 jobs in November.
The labor market's growth is expected to be slower as a result of an increase in the unemployment rate, although it's still forecast to remain at a lower level than in previous economic downturns, according to the NABE survey.
A 56% majority of respondents believe that the unemployment rate will peak at 5% or lower, while 17% think it will reach 5.5% or more, which would be similar to the unemployment rate during past recessions. The unemployment rate was unchanged month-over-month at 3.7% in the latest jobs report.
The Fed's battle against inflation isn't expected to end in the near future, according to the findings of the NABE report: 44% of the economists believe that inflation won't decline to the Fed's target rate of 2% year-over-year inflation until 2024, while another 42% believe that the Fed won't reach that target until 2025 or later.
Economists are predicting more aggressive interest rate hikes by the Fed next year, compared to the expectations in the last NABE report, which was released in October.
The median estimate for the federal funds rate target was set at 4.25% in the first quarter of 2023 and declined to 3.875% in the last two quarters two months ago. The federal funds rate target has a median of 4.875% in the first half of 2023 and then drops to 4.625% in the fourth quarter of 2023, according to the respondents' latest forecasts.
The more subdued outlook coincides with higher expectations for interest rates at the end of the year and next, said Dana Peterson, chair and chief economist for The Conference Board, the NABE Outlook SurveyNABE Outlook Survey chair and chief economist. Panelists believe that job growth will slow down over the first three quarters of 2023, but remain positive.