A growing number of economists are now predicting that the United States can achieve a “soft landing” instead of a recession. According to a survey conducted by Wolters Kluwer Blue Chip Economic Indicators, economists say there is a 50% chance of a recession in the next 12 months, down from 56% in July and 61% in May.
One of the main reasons for this more positive outlook is the continued strong growth of the US economy, despite the Federal Reserve’s aggressive interest rate hikes. The economy expanded at a better-than-expected 2.4% annual rate in the second quarter and has averaged 2.6% growth since the middle of last year. Consumer and business spending, which are the main drivers of the economy, are still strong, providing momentum for future growth.
Another factor contributing to the optimistic outlook is easing inflation. Annual inflation has been moderating more rapidly, falling to 3% in June from 4% in May and 9.1% in June 2022. Many economists believe that the Federal Reserve will hold interest rates steady after a series of rate hikes, reducing the risk of a downturn.
Healthy consumer spending is also supporting the idea of a soft landing. Consumption, which makes up about 70% of economic activity, rose at a 1.6% annualized rate in the second quarter. Incomes are still strong, and wage growth has outpaced inflation in recent months, giving consumers more purchasing power.
Business investment has rebounded, rising 7.7% in the second quarter after a slow start to the year. Higher interest rates were expected to curtail big-ticket business purchases, but the CHIPs and Science Act of 2022 has spurred a wave of private investment.
While there are reasons to be optimistic, some economists still believe that a recession is possible. They argue that the effects of the Federal Reserve’s rate hikes may not have fully kicked in yet and could lead to a scaleback in consumer and business spending and an increase in layoffs. Stricter lending criteria and higher gas prices are also potential risks to the economy.
Overall, the outlook for the US economy remains uncertain, with economists divided on whether a soft landing or a recession is more likely. The next few months will be crucial in determining the direction of the economy and whether it can avoid a downturn.A growing number of economists are now predicting that the United States can achieve a “soft landing” instead of a recession. According to a survey conducted by Wolters Kluwer Blue Chip Economic Indicators, economists say there is a 50% chance of a recession in the next 12 months, down from 56% in July and 61% in May.
One of the main reasons for this more optimistic outlook is the continued strong growth of the US economy. Despite the Federal Reserve’s aggressive interest rate hikes, the economy has shown sturdy growth. Additionally, inflation has recently decreased, reducing the likelihood of further rate increases that could dampen economic activity.
“The economy hasn’t really meaningfully decelerated,” says Aditya Bhave, senior US economist at Bank of America. Bhave points to a recent pickup in consumer and business spending as evidence of the economy’s resilience.
Bank of America recently upgraded its outlook and no longer predicts a mild recession in the first half of next year. However, other forecasters argue that the optimists are overlooking the potential impact of the Federal Reserve’s rate increases.
“The soft landing crowd – they’re looking at backwards-looking figures,” says Bob Schwartz, senior economist at Oxford Economics, which still projects a modest recession late this year or in early 2024.
There are several reasons why the US could avoid an economic slump. Firstly, the economy has been expanding at a better-than-expected rate, with consumer and business spending remaining strong. This momentum is expected to have ripple effects, leading to increased hiring and further boosting income and spending.
Inflation has also been easing, which many economists believe will lead to the Federal Reserve holding interest rates steady. This reduction in the risk of a downturn is another factor supporting the idea of a soft landing.
Consumer spending, which makes up a significant portion of economic activity, has remained healthy. Despite expectations of a decline in spending as pandemic-related savings are depleted, incomes remain strong due to ongoing labor shortages. This has given consumers more purchasing power and supported continued spending.
Business investment has rebounded, with outlays rising in the second quarter. This is partly attributed to federal funding for semiconductor research and production, which has spurred private investment.
While job growth has slowed, it has not experienced a significant pullback. Employers have been reluctant to lay off workers due to ongoing labor shortages, which has helped to sustain job gains.
Furthermore, recent federal spending on infrastructure and other projects is expected to modestly support economic growth next year.
However, there are still factors that could contribute to a recession. The effects of the Federal Reserve’s rate hikes may not have fully kicked in yet, and economists expect to see a bigger impact by early next year. Stricter lending criteria and higher gas prices could also negatively affect the economy.
Additionally, the restart of student loan payments and the depletion of pandemic-related savings could put pressure on consumer spending.
Overall, while economists are divided on the likelihood of a recession, there are arguments for both a soft landing and a downturn. The future trajectory of the US economy will depend on various factors, including the Federal Reserve’s actions and the resolution of ongoing challenges.
What factors support the continued growth of the US economy in the future?
Continued growth in the future.
Another positive factor is the easing inflation. Inflation has been moderating, which reduces the need for the Federal Reserve to implement further interest rate hikes. This helps to reduce the risk of a downturn in the economy.
Consumer spending is also supporting the idea of a soft landing. Consumption accounts for a significant portion of economic activity and has been growing steadily. Incomes are strong, and wage growth has outpaced inflation, giving consumers more purchasing power.
Furthermore, business investment has rebounded in the second quarter, defying expectations. Higher interest rates were anticipated to limit big-ticket business purchases, but the CHIPs and Science Act of 2022 has stimulated private investment.
However, some economists still believe that a recession is possible. They argue that the effects of the Federal Reserve’s rate hikes may not have fully taken hold yet, which could result in reduced consumer and business spending and increased layoffs. Additionally, stricter lending criteria and higher gas prices present potential risks to the economy.
Overall, the outlook for the US economy is uncertain, with economists divided on whether a soft landing or a recession is more likely. The next few months will be crucial in determining the direction of the economy and whether it can avoid a downturn.