The Federal Reserve WASHINGTON, Aug 16 (Reuters) – The U.S. Blame it on economic theory not matching reality, forecaster groupthink, or political bias by opponents of the Biden administration, but a year ago, much of the United States was certain the country was in or would shortly enter a recession.
The first two quarters of 2022 saw the United States’ economic production decrease at a 1.6% annual pace from January to March and at a 0.6% annual rate from April to June, and the country had already entered a downturn by one common, though not exactly precise, definition.
Why would it not? The Federal Reserve was rapidly raising interest rates, housing investment appeared to be sagging, and conventional wisdom predicted that other industries, consumer spending, and the labor market would all suffer as well.
“A number of forces have coincided to slow economic momentum more rapidly than we previously expected,” Michael Gapen, Bank of America’s top U.S. economist, said in a July 2022 report. “We now expect a slight recession in the United States this year… In addition to the loss of recent fiscal assistance… inflation shocks have eaten into real spending power of households more forcefully than we predicted previously, and financial conditions have tightened substantially as the Fed switched its tone toward more fast policy rate hikes.”
After a year, the unemployment rate, at 3.5% in July, is actually lower than where many experts expected it to be, consumers continue to spend, and many professional economic projections have followed Gapen in a course correction.
Reuters surveys of economists during the last year revealed that the likelihood of a recession one year from now rose from 25% in April 2022, the month following the Fed’s first rate rise of the current tightening cycle, to 65% in October. The most recent reading was 55%.
“Incoming data has made us reassess our prior view” of a coming recession, which had already been pushed out to 2024, Gapen said earlier this month. “We revise our forecast in favor of a soft landing,’ with growth falling below trend in 2024 but remaining positive overall.”The Federal Reserve and analysts have revised
The recession revisionists include the Fed’s own staff, who followed their models to steadily downgrade the outlook for the US, moving from increased concerns about “downside risk” last fall to citing recession as a “plausible” outcome last December and then projecting that recession would begin this year as of the Fed’s March 2023 meeting.
With the failure of California-based Silicon Valley Bank likely to place more constraints on bank credit, “the staff’s projection… included a mild recession starting later this year, with a recovery over the subsequent two years,” according to the minutes of the Fed’s March 21-22 meeting. The Federal Reserve and analysts have revised
The Fed’s staff predictions in May and June “continued to assume” that the US economy would be in recession by the end of the year.
The more pessimistic picture vanished at the July 25-26 meeting, according to Fed Chair Jerome Powell, with maybe additional specifics about the staff outlook to follow in the minutes from that meeting, which will be released at 2 p.m. EDT (1800 GMT) on Wednesday.
“The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” Powell said at a news conference following the conclusion of last month’s policy meeting.
The Federal Reserve and analysts have revised
Fed officials’ quarterly predictions of GDP have never seen it shrinking on a yearly basis.
What was the difference between a recession that many felt was imminent last year and growth that has surprised to the upside?
The forecast was not even close to being met: Growth had risen to a strong 3.2% annual pace by the third quarter of last year and has been at 2% or higher since then, greater than the 1.8% the Fed estimates the economy’s underlying potential. The Atlanta Fed’s GDP “nowcast” for the current July-September period is 5.0%, indicating ongoing strong momentum.
The persistence of US consumers, who have remained “chugging along” and spending more than predicted, is an important element of the tale, according to Omair Sharif, president of Inflation Insights.
Spending has changed from the goods-gorging purchases observed at the onset of the coronavirus epidemic to the brisk services sector, which surged last summer with billion-dollar film runs and music events.
The Federal Reserve and analysts have revised the 2023
However, regardless of what’s in the basket, the dollar amounts continue to rise, prompting economists to postpone the date when the “excess savings” of the pandemic era will run dry or to wonder whether low unemployment, ongoing strong hiring, and labor “hoarding” by companies, along with rising earnings, have trumped any concerns about the outlook.
But that’s not all.
It’s possible that high-interest rates aren’t as effective in an economy that spends more on less rate-sensitive services and where businesses have continued to borrow and invest more than many economists predicted – possibly to capitalize on regulatory shifts aimed at encouraging technology and green energy projects. The Federal Reserve and analysts have revised the 2023
Local government expenditure surged, providing an unexpected boost to development as municipalities put pandemic-era monies to work on a delayed basis. The Federal Reserve and analysts have revised the 2023
Will it last?
One danger is that inflation resurges with a tighter-than-expected economy, necessitating even tougher Fed policy and inducing the inflation-killing slump that authorities still seek to avoid. The Federal Reserve and analysts have revised the 2023
However, the chances of such happening are decreasing.
“We’ve been wavering for a while on whether to shift to the soft-landing camp, but not any longer,” Sal Guatieri, a senior economist at BMO Capital Markets, said of the Fed’s expectations of decreasing inflation without triggering a recession. The Federal Reserve and analysts have revised the 2023
He stated that the “broad strength” of the US economy “convinced us that the US economy is more durable than predicted… It is not only not slowing down, but it may be speeding up.”