And forecasters see a soft(er) landing for the economy

Key takeaways

  • Economists at Deutsche Bank have softened their forecasts for an imminent recession in the US economy, pushing back its start date to early 2024 and predicting a slight rise in unemployment.
  • The U.S. economy remains resilient even as the Federal Reserve squeezes households and businesses with higher interest rates in an effort to control inflation.
  • The lack of mass layoffs has surprised economists and officials, who expected rate hikes to increase unemployment, as has typically happened with rate hikes historically.

More decision makers at the Federal Reserve and on Wall Street are coming around to the view that the U.S. economy may avoid a recession, or at least have a kinder, gentler recession than they had predicted.

Economists at Deutsche Bank released a revised outlook on the economy on Monday, reducing the pessimism of their previous forecast calling for a recession. The bank now expects the recession to start in early 2024 rather than the end of 2023, and unemployment to hit 4.6%, up from 5% in their last forecast and up from the current level of 3.8% in August.

On Monday, the Fed’s vice chairman for oversight and a member of the Fed’s policy committee, Michael S. Barr added his voice to the chorus of Fed officials.

In a speech at the Forecasters Club in New York, Barr said, „I now see a higher probability than not that the U.S. economy will return to price stability without the magnitude of job losses that typically accompany significant monetary policy tightening cycles,” according to prepared comments.

As inflation soared last year in the wake of post-pandemic reopenings, some economists warned that millions of people could lose their jobs as consumer spending plummeted. Falling consumer spending should allow supply and demand to rebalance sufficiently enough to stop the acceleration in prices of everyday goods.

Since then, inflation has cooled (still not below the 2% annual rate targeted by central bank policymakers) and unemployment has remained low, raising hopes that the economy is in a „soft landing” rather than a crash.

It would be a historic rarity. The central bank has raised its key interest rate to a 22-year high to fight inflation. In the past, high interest rates have proved bitter medicine for the economy, discouraging borrowing and spending and causing recessions eight of the past nine times the central bank has engaged in rate-hiking campaigns.

This time, consumer spending and employment remained resilient, raising the possibility of a soft landing. It also prompts central bank officials to warn that they may need to keep interest rates on hold for longer to bring inflation under control.

Of course, the economy is not out of the woods. Deutsche Bank’s forecasters pointed to several forces that could soften the landing: higher gas prices, student loan payments diverting money from other spending, an auto worker strike and banks’ reluctance to lend. Powerful forces pulling the economy towards recession.

„Over the past several months, the case for a soft landing has become undeniably stronger,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, wrote in a commentary along with other economists. „Despite these improvements, we continue to see the economy slow amid intensifying cross-cutting.”

A September survey of professional forecasters by the Federal Reserve Bank of Philadelphia put the chances of a recession in the last quarter of 2023 at one in three.

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