The U.S. economy could soon declare mission accomplished as the country could be progressing toward the widely anticipated soft landing. According to a new report by a group of top economists, recession risks have diminished, the labor market remains solid, and inflation moderates.
Sixteen chief economists from the nation’s largest financial institutions contributed to the forecast issued by the Economic Advisory Committee (ECA) of the American Bankers Association. They noted that recession odds have tumbled over the past six months, although they remain at about 30 percent amid policy and geopolitical risks.
In recent months, many surveys of economists, market analysts, and strategists have highlighted a sharp drop in recession expectations, a complete reversal from just a year ago. The Conference Board entirely abandoned its recession call, while many banks have predicted modest growth prospects.
ECA economists project real economic growth at 1.7 percent in 2024 and 1.8 percent in 2025.
On the inflation front, the committee expects inflation to continue gradually advancing toward the Federal Reserve’s 2 percent target. Using the central bank’s preferred inflation reading, the personal consumption expenditures (PCE) price index, the ECA projects the PCE will slow to 2.4 percent by the end of the year and approach 2.1 percent by the end of 2025.
As for the labor market, the chief economists believe softening is ahead as job creation is forecast to average 139,000 per month in 2024 and 117,000 next year. The unemployment rate will rise to 4.1 percent later this year and remain little changed for the foreseeable future.
“Last year’s combination of resilient growth and moderating inflation is unusual historically and should be celebrated,” said Simona Mocuta, committee chair and chief economist at State Street Global Advisors. “The elements appear in place to extend a milder version of this in 2024, although we should not take this for granted. The risks to the outlook are two-sided but nuanced. The committee sees risks to the growth forecast as fairly balanced, but risks to the inflation forecast remain skewed to the upside.”
The latest forecast comes after the final estimate for fourth-quarter GDP growth was released.
According to the Bureau of Economic Analysis, the U.S. economy expanded by a higher-than-expected 3.4 percent in October–December 2023, fueled by higher consumer and government spending.
Mixed Commentary on Soft Landing Narrative
In January, the White House declared that the sought-after soft landing had been successfully engineered.Fed Chair Jerome Powell, however, has not been quick to run a victory lap, reiterating that a soft economic landing continues to be an uncertain outcome.
While achieving the central bank’s dual mandate of maximum employment and price stability is “moving into better balance,” Mr. Powell still believes it is premature.
That said, even if the Fed engineered a soft landing, policymakers would be unlikely to make a declarative statement to the public.
Mr. Powell said in his semiannual monetary policy address to the House Financial Services Committee that the institution will not be declaring victory.
The Deal With Interest Rates
The ECA’s consensus is that the Fed will proceed with three quarter-point rate cuts this year, beginning in mid-2024.“The committee believes that easing wage pressures and realized progress on inflation will allow the Fed to begin reducing the restrictiveness of its policy stance later this year,” Ms. Mocuta said.
This aligns with the central bank’s updated Summary of Economic Projections in March. The Fed stuck with its three rate cuts in 2024, forecasting a median policy rate of 4.6 percent by the year’s end.
Investors are also penciling in three rate cuts, with the initial reduction occurring at the policy meeting of the Federal Open Market Committee in June.
According to the CME Fed Watch Tool, the futures market signals a 61 percent chance of a 25-basis-point pivot in June.
While Mr. Powell and his colleagues have asserted that they are comfortable with keeping rates elevated for longer until the inflation threat has been defeated, experts note that the institution will eventually be forced to pull the trigger on a rate cut.
“The bottom line is that the Fed seems comfortable with allowing inflation to run hotter than previously expected this year, aiming to bring it back to the 2.0 percent target through a more gradual series of rate cuts next year and beyond,” John Lynch, CIO at Comerica Wealth Management, said in a note. “Just remember that when the Fed typically cuts rates, it does so because it has to, with the associated near-term risks of economic and market volatility.”
While appearing before the Economic Club of New York, Fed Gov. Christopher Waller noted in prepared remarks that the central bank is in “no rush to cut the policy rate” as the latest economic data tells him that “it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2 percent.”
“We’re in a situation where if we ease too much or too soon, we could see inflation come back, and if we ease too late, we could do unnecessary harm to employment and people’s working lives,” Mr. Waller said.
“We want to be careful.”
Recent Data Releases
With inflation data coming in hotter than expected in the first two months of 2024, officials might not want to take any chances, particularly with the national economy expanding better than many had projected.The annual inflation rate came in higher than expected for two straight months, with the CPI rising to 3.2 percent in February.
The producer price index, a precursor to the direction of consumer prices, advanced by 0.6 percent monthly.
According to the Bureau of Economic Analysis, the PCE price index rose to 2.5 percent in February.
