Forecasters have modestly improved their forecasts for the economy and the labor market, and now expect the recession to begin later in 2023 than they thought.
Still, 58% of economists say there is more than a 50% chance of an economic downturn in the next 12 months, according to a panel of 48 forecasters. to survey 3-10 February by the National Association for Business Economics (NABE). This is roughly the same share as in the December survey.
But only 28% expect a recession to begin this quarter, compared to 52% who held this view in December. Instead, 33% expect a recession to start in the second quarter, and another 21% say it will start in the third.
The main reason behind the improved outlook is January’s impressive gain of 517,000 jobs and the drop in the unemployment rate to 3.4%, the lowest in 54 years. The jobs report, released by the Labor Department early this month, portrayed a more vibrant job market than captured by the steady slowdown in monthly payroll gains late last year to 300,000 or so.
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What will the job market look like in 2023?
NABE forecasters now project average monthly employment additions to 256,000 in the current quarter, up from their estimate of 103,000 in December, according to their median forecast.
They also expect job gains to average 102,000 per month for the whole of 2023, up from 76,000 in December, and unemployment rising to 4.3% by the fourth quarter, down from the 4.5% that was expected.
Even as they expect the nation to slide into a mild recession this year, most economists think unemployment could peak at just 4.9% — a historically low level.
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Is consumer spending increasing?
Booming job earnings has boosted Americans’ income and spending, which makes up 70% of economic activity. The Commerce Department said Friday that consumption jumped 1.8% in January, the biggest gain in nearly two years, despite rising inflation, higher interest rates and shrinking reserves of extra cash that American households accumulated early in the pandemic.
“I think the economy has proven to be more resilient than many economists had predicted,” says Ken Simonson, a NABE survey analyst and chief economist at Associated General Contractors, a construction industry trade group.
Many experts say lower household debt and savings associated with the pandemic and a vibrant job market have helped Americans withstand the higher costs of inflation and higher interest rates.
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What will be the effects of Fed hikes?
To be sure, growth is set to slow as the Fed’s most aggressive rate-raising campaign since the 1980s – aimed at lowering inflation – reduces consumer and business spending. Many economists believe the strategy will lead to a recession this year.
But NABE forecasters expect the economy to grow 0.8% in 2023 — based on the change in average GDP over the four quarters compared to 2022. That’s down from 2.1% last year but higher than their estimate of 0.5% in December.
Inflation in general has fallen rapidly in recent months, and forecasters predict that the consumer price index will rise 3% in 2023, down from the December estimate of 3.1% and the 6.5% rise recorded last year.
However, they estimate that the Fed’s key interest rate will end 2023 in a range of 4.75% to 5%, above the 4.5% to 4.75% range they previously forecast but below the 5% to 5.25% range that Fed officials projected.
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What is the biggest risk to the economy?
Only 51% of economists say excessive Fed increases pose the greatest risk to the economy, down from 65% in December. A small but growing share now see the widening war in Ukraine as the greatest danger.
However, the NABE survey was conducted ahead of recent reports that showed inflation rose more than expected in January, a development that could prompt the Federal Reserve to raise interest rates more sharply.
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