According to economists polled by Reuters, the U.S. economy is heading for a short and shallow recession over the next year, according to economists who unanimously expected the U.S. Federal ReserveFederal Reserve to go for a smaller 50 basis point interest rate hike on December 14.
The Fed has a half-point to go with rates early in the new year, with inflation still above the Fed's 2% target, even though economists say there is a 60% chance that a recession will take place in 2023.
After raising the federal funds rate 75 basis points at each of the previous four meetings, all 84 economists polled Dec. 2 -- 8 predicted the central bank to go for a slightly softer half a percentage point to 4.25% -- 4.50% this time.
While the central bank is trying to deliver some pain, economists, who tend to be slow as a group in forecasting recessions, raised the probability of one in two years to 70% from 63% previously.
It's possible that investors and stock markets may have gotten ahead of themselves with optimism over the past month that the world's largest economy may skirt a recession entirely. That is already showing up in safe-haven flows to the U.S. dollar.
The U.S. economy still appears to be headed for some trouble, unless inflation recedes quickly, according to the U.S. economy. Sal Guatieri, senior economist at BMO Capital Markets said that the downturn should be tempered by extra savings.
This assumes that the economy's durability doesn't compel the Fed to slam the brakes even harder, in which case a delayed downturn might only flag a deeper one. One-third of the economists, 24 of 72, think it will go higher, as the fed funds rate is expected to peak at 4.75% -- 5.00% early next year, in line with interest rate futures.
There are already clear signs that the economy is slowing, particularly in the U.S. housing market, which is often the first to react to tighter financial conditions and the epicenter of the 2007 -- 08 recession.
Existing home sales have fallen for nine months in a row. The house prices, already in retreat, were expected to drop 12% peak-to- trough and nearly 6% next year, according to a separate Reuters poll.
Around 60% of the economists, 27 of 45, who provided quarterly gross domestic product forecasts, predicted a contraction for two straight quarters or more at some point in 2023.
A large majority of economists, 35 of 48, said that any recession would be short and shallow. Eight said long and shallow, while four said there won't be a recession. The world's largest economy is projected to grow just 0.3% next year and grow at annual rates well below the long-term average of around 2% until 2024.
Over 75% of economists, 29 of 38, said that the risk to their GDP forecasts was skewed to the downside.
With inflation expected to stay above the Fed's target at least until 2026 and the labor market being strong, the bigger risk was that rates would peak higher and later than expected.
With core inflation likely remaining high, we now expect the current tightening process to continue through Q 2, 2023, said Jan Groen, chief U.S. macro strategist at TD Securities, who expected the fed funds rate to peak at 5.25% -- 5.50% in May.
He said that there is a risk of an even higher terminal rate given the high and sticky rates of core inflation and strong labor market conditions.
The unemployment rate in the United States is expected to climb from current 3.7% to 4.9% by early 2024, and has so far stayed low. If realized, that would still be well below the levels seen in previous recessions.