US recession odds increase following rate hikes, bank struggles
A survey of economists reveals heightened expectations of a downturn
?Odds of the US economy backsliding into a recession are higher now than a month ago after steady interest-rate hikes by the Federal Reserve and growing risks of tighter credit conditions in the wake of several bank failures.
The probability of a downturn in the next 12 months stands at 65%, up from 60% odds in February, according to the latest Bloomberg monthly survey of economists. The poll was conducted March 20-27, in the aftermath of several bank closures that included Silicon Valley Bank, with 48 economists responding about the odds of a recession.
After the Fed last week raised rates a quarter percentage point to the highest since 2007, economists worry not only about the impact on demand but the effect on the banking system. The collapse of SVB was precipitated by higher interest rates that reduced the value of the firm’s holdings of Treasuries.
Financial institutions risk becoming more guarded in their lending approach, restricting access to capital needed by businesses to expand and consumers to buy homes, cars and other big-ticket items.
“Even if the problem seems to have been contained so far, the full impact of recent events is still to unfold,” said James Knightley, chief international economist at ING. “Higher borrowing costs and reduced access to credit, resulting from banking stresses, mean a greater chance of a hard landing for the US economy.”
Economists in the Bloomberg monthly survey maintained their expectations of another 25 basis-points increase in the Fed’s benchmark rate to a range of 5%-5.25% at the May meeting. They see the fed funds rate holding there through the rest of the year as the central bank tries to tamp down inflation.
At the same time, forecasters also boosted their projections for the Fed’s preferred inflation gauge — the personal consumption expenditures price index — for every quarter through the third quarter of 2024.
The metric is now seen averaging 3.9% in 2023 on an annual basis, up from last month’s projection of 3.4% and about double the Fed’s target. Respondents also boosted their expectations for the consumer price index for this year and the next.
Fed officials have doubled down on the resilient labor market as one of the reasons why inflation has remained sticky, with strong wage gains helping fuel price pressures. Economists now forecast a delayed downturn in the job market and see the unemployment rate averaging 3.9% in 2023 compared with 4% last month.
They expect it to climb to a peak of 4.7% in the second quarter of next year.
Meantime, the median estimates see gross domestic product averaging 1% in both 2023 and 2024. Consumer spending, which accounts for about two-thirds of GDP, is projected to rise 1.4% this year, despite a sharp deceleration in the upcoming quarters.
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