Despite Easing Price Pressures, Economists in WSJ Survey Still See Recession This Year

The Federal Reserve had initially hoped it could bring down inflation with only a slowing in economic growth rather than an outright contraction, an outcome dubbed a “soft landing.” But three-quarters of respondents said the Fed wouldn’t achieve a soft landing this year. 

That is despite a slightly more optimistic outlook for inflation. As measured by the year-over-year change in the consumer-price index, inflation has eased from 9.1% last June to 6.5% in December, and economists expect it to fall to 3.1% by the end of this year, a lower endpoint than the 3.3% they expected in the last survey, in October. They see it ending 2024 at 2.4%, little changed from the previous survey.  

“While recent inflation prints have shown some progress, a few persistent categories like core services are associated with the historically tight labor market, suggesting that there is still ‘a long way to go’ for the Fed,” Deutsche Bank economists

Brett Ryan

and

Matthew Luzzetti

said in the survey. “The Fed would stay on its tightening trajectory to restore the rebalance of labor market and price stability, which in our view would engineer a sharp rise in unemployment and recession,” they added.  

Greg Daco,

chief economist at EY-Parthenon, said, “While services activity remains robust, the housing sector is tumbling under the weight of elevated mortgage rates and manufacturing activity is stalling—both signaling a broader economic downturn is likely coming.” He expects the combination of persistent inflation, tighter financial conditions and weaker global growth to tip the U.S. economy into a mild recession in the first half of 2023.

While economists don’t think a recession can be avoided, they expect it to be relatively shallow and short-lived, in line with other recent surveys.

On average, they expect gross domestic product to expand at a 0.1% annual rate in the first quarter of 2023 and contract 0.4% in the second. They see no growth for the third quarter and a 0.6% growth rate for the fourth.

Economists expect GDP to stagnate this year, posting growth of just 0.2% in the fourth quarter of 2023 compared with the fourth quarter of 2022. In the WSJ survey in October, economists forecast 0.4% GDP growth in 2023.

While most recessions have included at least two consecutive quarters of negative growth, that isn’t the criterion used by the panel at the National Bureau of Economic Research, a nonprofit academic group, which dates business cycles. A recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” NBER says on its website. Still, even that definition is loose because NBER ultimately declared the 2020 downturn at the start of the Covid-19 pandemic a recession even though it lasted only two months.

Employers are expected to cut jobs starting in the second quarter through the end of the year, the survey found. For 2023 as a whole, economists expect that payrolls will decline by 7,000 a month on average. That is a sharp downgrade from October’s survey, when economists expected employers to add nearly 28,000 jobs a month over the subsequent four quarters. 

Economists view high inflation, and the Fed’s efforts to tame it, as a top risk to the economy this year.

When asked which category of inflation will be the hardest to tame in 2023, a quarter of economists picked housing. A further 18% said healthcare and another 18% picked personal services.

Economists in the survey expect the Fed will need to raise the benchmark federal-funds rate target to 5% this year, in line with central-bank officials’ own projections. The Fed lifted the rate target by a half percentage point in December, to between 4.25% and 4.5%. Fed officials are trying to balance the risk of raising rates too much with the risk of not doing enough to slow down spending and investment, which could allow higher inflation to become entrenched.

Fed officials have signaled they don’t expect to cut rates this year. Economists disagree: 51% expect the Fed to start cutting this year, although that is down from 60% in the last survey. Markets also are pricing in interest-rate cuts this year.

The Fed will start cutting in the fourth quarter of this year, according to 31% of economists. Another 37% expect that in the first quarter of 2024, and 8% expect it in the second quarter of next year.

The Journal surveyed 71 economists, although not every economist answered every question. The survey was conducted Jan. 6-10.

Write to Harriet Torry at [email protected] and Anthony DeBarros at [email protected]

The Federal Reserve had initially hoped it could bring down inflation with only a slowing in economic growth rather than an outright contraction, an outcome dubbed a “soft landing.” But three-quarters of respondents said the Fed wouldn’t achieve a soft landing this year. 

That is despite a slightly more optimistic outlook for inflation. As measured by the year-over-year change in the consumer-price index, inflation has eased from 9.1% last June to 6.5% in December, and economists expect it to fall to 3.1% by the end of this year, a lower endpoint than the 3.3% they expected in the last survey, in October. They see it ending 2024 at 2.4%, little changed from the previous survey.  

“While recent inflation prints have shown some progress, a few persistent categories like core services are associated with the historically tight labor market, suggesting that there is still ‘a long way to go’ for the Fed,” Deutsche Bank economists

Brett Ryan

and

Matthew Luzzetti

said in the survey. “The Fed would stay on its tightening trajectory to restore the rebalance of labor market and price stability, which in our view would engineer a sharp rise in unemployment and recession,” they added.  

Greg Daco,

chief economist at EY-Parthenon, said, “While services activity remains robust, the housing sector is tumbling under the weight of elevated mortgage rates and manufacturing activity is stalling—both signaling a broader economic downturn is likely coming.” He expects the combination of persistent inflation, tighter financial conditions and weaker global growth to tip the U.S. economy into a mild recession in the first half of 2023.

While economists don’t think a recession can be avoided, they expect it to be relatively shallow and short-lived, in line with other recent surveys.

On average, they expect gross domestic product to expand at a 0.1% annual rate in the first quarter of 2023 and contract 0.4% in the second. They see no growth for the third quarter and a 0.6% growth rate for the fourth.

Economists expect GDP to stagnate this year, posting growth of just 0.2% in the fourth quarter of 2023 compared with the fourth quarter of 2022. In the WSJ survey in October, economists forecast 0.4% GDP growth in 2023.

While most recessions have included at least two consecutive quarters of negative growth, that isn’t the criterion used by the panel at the National Bureau of Economic Research, a nonprofit academic group, which dates business cycles. A recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” NBER says on its website. Still, even that definition is loose because NBER ultimately declared the 2020 downturn at the start of the Covid-19 pandemic a recession even though it lasted only two months.

Employers are expected to cut jobs starting in the second quarter through the end of the year, the survey found. For 2023 as a whole, economists expect that payrolls will decline by 7,000 a month on average. That is a sharp downgrade from October’s survey, when economists expected employers to add nearly 28,000 jobs a month over the subsequent four quarters. 

Economists view high inflation, and the Fed’s efforts to tame it, as a top risk to the economy this year.

When asked which category of inflation will be the hardest to tame in 2023, a quarter of economists picked housing. A further 18% said healthcare and another 18% picked personal services.

Economists in the survey expect the Fed will need to raise the benchmark federal-funds rate target to 5% this year, in line with central-bank officials’ own projections. The Fed lifted the rate target by a half percentage point in December, to between 4.25% and 4.5%. Fed officials are trying to balance the risk of raising rates too much with the risk of not doing enough to slow down spending and investment, which could allow higher inflation to become entrenched.

Fed officials have signaled they don’t expect to cut rates this year. Economists disagree: 51% expect the Fed to start cutting this year, although that is down from 60% in the last survey. Markets also are pricing in interest-rate cuts this year.

The Fed will start cutting in the fourth quarter of this year, according to 31% of economists. Another 37% expect that in the first quarter of 2024, and 8% expect it in the second quarter of next year.

The Journal surveyed 71 economists, although not every economist answered every question. The survey was conducted Jan. 6-10.

Write to Harriet Torry at [email protected] and Anthony DeBarros at [email protected]