Inflation, robust job data divides America’s top economists
Most panelists believe the Fed will begin cutting interest rates in Q4 2023 or Q1 2024
America’s top economists are divided on their outlook for the U.S. economy amid persistently hot inflation data and robust job growth.
The National Association for Business Economics (NABE) released the February 2023 edition of its economic outlook survey on Monday, which showcased a wide range of opinions among economists on prospects for U.S. growth, inflation, and a potential recession this year. NABE President Julia Coronado, who is also the president and founder of MacroPolicy Perspectives LLC, said the survey’s results reflect "significant divergence regarding the outlook for the U.S. economy."
"Estimates of inflation-adjusted gross domestic product or real GDP, inflation, labor market indicators, and interest rates are all widely diffused, likely reflecting a variety of opinions on the fate of the economy – ranging from recession to soft landing to robust growth," Coronado added.
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Underscoring that wide range of views, the NABE survey’s median for U.S. real GDP growth from Q4 2022 to Q4 2023 came in at 0.3% – with estimates from the lowest five and highest five ranging from -1.3% to 1.9%.
A majority of panelists continue to believe the U.S. economy will experience a recession in 2023, with 58% of survey panelists believing the likelihood of a recession in the next 12 months is greater than 50%.
However, panelists’ views on when that recession will begin have shifted from the December survey, when 52% of respondents expected a recession would begin in Q1 2023. Only 28% hold that view as of February, while a further 33% expect a recession to begin in Q2, 21% in Q3, and 9% each in Q4 or after 2023.
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Economists surveyed for the NABE outlook continue to see the unemployment rate rising, but the uptick is expected to be smaller than in prior surveys. The consensus forecast sees unemployment rising from 3.5% in Q1 2023 to 4.4% in Q1 2024, then averaging 4.3% for all of next year. A strong 77% majority of respondents believe that the unemployment rate will peak at 4.9% or lower in the next 12 months, while 23% believe it will peak at 5% or higher.
Inflation is expected to remain above the Federal Reserve’s target rate of 2%, although economists see inflation slowing over the course of 2023 and 2024. NABE survey respondents see the consumer price index (CPI) rising by 3% year-over-year as of Q4 2023, a significant slowdown compared to a like period ending in Q4 2022 that came in at 7.1%. Headline inflation is expected to decline further to 2.3% year-over-year as of Q4 2024 – slightly above the Fed’s goal.
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"Panelists’ views are split regarding how high the Federal Reserve may raise interest rates, how long rates might stay at the peak, when cuts would begin, and what would signal the central bank’s actions on each of these fronts," said NABE Outlook Survey chair Dana Peterson, who is also the chief economist for the Conference Board.
Economists surveyed by the NABE have modestly increased their projection for the federal funds rate to 4.875% at year-end 2023 in the latest survey. The December survey projected that the federal funds rate would be 4.625% at year-end 2023.
They also expect the Federal Reserve to begin cutting interest rates around the end of this year, with 33% expecting cuts to begin in Q4 2023 and another 33% in Q1 2024. Just 7% see cuts coming before Q4 2023, while 26% see the first cuts arriving in Q2 2024 or later.
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The looming debate over raising the debt ceiling, which will likely have to occur this summer or early fall before the Treasury Dept. exhausts its extraordinary measures to avoid default, also came up in the NABE survey.
An overwhelming 71% majority of economists surveyed believe the debt limit will be raised to resolve the situation, while 26% believe it will be suspended, and only 2% expect the U.S. to breach the debt limit.