Odds now favor that the U.S. economy slipping into a recession within the next year, with economists expecting the labor market and demand will become casualties in the Federal Reserve’s inflation battle.
The probability of a downturn over the next 12 months stands at 60%, up from 50% odds in September and double what it was six months ago, according to the latest Bloomberg monthly survey of economists. The latest poll was conducted Oct. 7-12, with 42 economists responding about the chance of a recession.
A “significant tightening of financial conditions is a clear headwind to growth and comes at a time when consumer and business confidence is already under immense pressure from the rising cost of living and falling equity, bond and real estate prices,” said James Knightley, chief international economist at ING.
The survey results underscore the expected toll of the Fed’s steep interest-rate increases on household demand, business investment and the job market. Economists surveyed lowered their estimates for consumer spending for every quarter through the end of next year, including sub-1% average increases in the first half of 2023.
Private investment, which includes business spending on equipment, is seen declining from the fourth quarter through the first half of next year. That’s a huge markdown from the previous survey which showed modest to moderate increases.
The outlook for the job market also showed a steep downgrade from a month ago, with payrolls growth projected to average less than 70,000 in every quarter next year. Employment is seen near flat in the third quarter of 2023, while the jobless rate is expected to peak at a 4.5% average entering 2024.
Labor market
Those projections are a far cry from the 420,000 monthly payroll additions on average so far this year and a current unemployment rate of 3.5% that matches the lowest since 1969.
Forecasts for a key inflation metric watched by the Fed — the personal consumption expenditures price index excluding food and energy — were raised for each quarter this year and next. Economists now see the core PCE price gauge averaging 4.7% in the current quarter on a year-over-year basis. That’s 0.4 percentage point higher than last month’s estimate.
The forecasts were submitted prior to Thursday’s release of the September consumer price index report, which showed the core measure re-accelerated to a four-decade high and exceeded forecasts.
