According to the latest survey by the National Association of Business Economics, only 25% of business economists and analysts foresee the United States entering into a recession this year. This optimistic outlook suggests that any potential downturn would likely be triggered by external factors, such as a conflict involving China, rather than domestic economic issues like higher interest rates.
It is worth highlighting that just a year ago, most forecasters were predicting a recession for the world's largest economy as the Federal Reserve raised interest rates to counter a burst of inflation that began in 2021. However, despite raising its benchmark rate 11 times between March 2022 and July 2023, the economy continued to grow unexpectedly, and employers maintained their hiring practices while resisting layoffs despite increased borrowing costs.
This combination of falling inflation rates, which dropped from a peak of 9.1% in June 2022 to 3.4% in December, and resilient economic growth has fostered hope that the Federal Reserve can achieve what is called a 'soft landing.' This refers to the successful taming of inflation without subjecting the economy to the harsh consequences of a recession.
According to Sam Khater, chief economist at mortgage giant Freddie Mac and chair of the NABE's economic policy survey committee, there is a more positive sentiment regarding the domestic economy among the panelists. With the Federal Reserve no longer raising rates and signaling a plan to reduce rates three times this year, the overall mood is leaning towards cautious optimism.
However, concerns have emerged among a growing number of business forecasters who believe that the Federal Reserve's policy is unnecessarily constraining the economy. The survey shows that 21% of respondents consider the Fed's policy to be 'too restrictive,' up from 14% in August. Nevertheless, a majority (70%) still believe that the Fed's stance is appropriate.
While the internal economic landscape appears relatively stable, the survey indicates that external factors pose a significant threat to the outlook. For instance, 63% of participants consider a conflict between China and Taiwan to be at least a 'moderate probability.' Furthermore, 97% believe there is a moderate chance that conflict in the Middle East will push oil prices above $90 per barrel and disrupt global shipping, up from the current level of around $77 per barrel.
Additionally, concerns over political instability in the United States, both before and after the November 5 presidential election, are causing anxiety among 85% of respondents. The potential impact on U.S. government finances is also on the radar, with 57% suggesting that budget policies should be more disciplined. This figure represents a slight increase from the 54% who expressed this concern in August.
When it comes to government budget priorities, the majority (45%) view promoting medium- to long-term growth as the most important objective. Reducing the federal deficit and debts follows closely behind, cited by 42% of participants. Notably, only 7% consider reducing income inequality as a top priority.
As the U.S. economy continues to navigate its way through various challenges, it is evident that both domestic and international factors play crucial roles in shaping its future trajectory. The survey results highlight the cautious optimism among business economists and analysts, with hopes of achieving a soft landing for inflation. However, growing concerns surrounding geopolitical risks and government finances remind us that uncertainties persist and require careful attention.
