US Economy: Recession Risks Are Fading, Economists Say, But Political Tensions Pose Threat

US Economy: Recession Risks Are Fading, Economists Say, But Political Tensions Pose Threat

A year ago, most forecasters expected the US economy - the world's largest - to slide into a recession as the Fed raised interest rates.

FPJ Web DeskUpdated: Monday, February 12, 2024, 01:28 PM IST
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Just a quarter of business economists and analysts expect the United States to fall into recession this year. And any downturn would likely result from an external shock - such as a conflict involving China - rather than from domestic economic factors such as higher interest rates.

But respondents to a National Association of Business Economics survey released Monday still expect year-over-year inflation to exceed 2.5 per cent -- above the Federal Reserve's 2 per cent target -- through 2024.

Defying the forecasts

A year ago, most forecasters expected the US economy - the world's largest - to slide into a recession as the Fed raised interest rates to fight a burst of inflation that began in 2021. The Fed hiked its benchmark rate 11 times from March 2022 to July 2023, taking it to the highest level in more than two decades.

Inflation has fallen from a peak of 9.1 per cent in June 2022 to 3.4 per cent in December. But the economy unexpectedly kept growing and employers kept hiring and resisting layoffs despite higher borrowing costs.

Resilient Prospects of Yankees

The combination of tumbling inflation and resilient growth has raised hopes - reflected in the NABE survey - that the Fed can achieve a so-called soft landing: vanquishing inflation without the pain of a recession.

"Panelists are more optimistic about the outlook for the domestic economy,' said Sam Khater, chief economist at mortgage giant Freddie Mac and chair of the association's economic policy survey committee.

The Fed has stopped raising rates and has signalled that it expects to reduce rates three times this year.

But a growing share of business forecasters worry that the Fed is keeping rates unnecessarily high: 21 per cent in the NABE survey called the Fed's policy "too restrictive", up from the 14 per cent who expressed that view in August. Still, 70 per cent say the Fed has it "about right".

What worries respondents are the chances of a conflict between China and Taiwan even if it isn't an outright war: 63 per cent consider such an outcome at least a "moderate probability".

Uncertainty looms large over global events

Likewise, 97 per cent see at least a moderate chance that conflict in the Middle East will drive oil prices above USD 90 a barrel (from around USD 77 now) and disrupt global shipping.

Another 85 per cent are worried about political instability in the United States before or after the November 5 presidential election.

The respondents are also increasingly concerned about US government finances: 57 per cent say budget policies - which have created a huge gap between what the government spends and what it collects in taxes - need to be more disciplined, up from 54 per cent in August.

They say the most important objectives of government budget policy should be promoting medium- to long-term growth (cited by 45 per cent of respondents) and reducing the federal deficit and debts (42 per cent). Coming in a distant third - and cited by 7 per cent -- is the goal of reducing income inequality.

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