U.S. Recession Probability Soars as Inflation Pains Worsen
Economists see interest-rate increases raising likelihood of recession to 44% in coming 12 months. Economists surveyed by the Wall Street Journal have dramatically raised the probability of recession to a level usually seen only on the brink of or during actual recessions.
Economists on average put the probability of the economy being in recession sometime in the next 12 months at 28% in the Journal’s last survey in April and at 18% in January.
The WSJ notes: “Since the Journal began asking the question in mid-2005, a 44% recession probability is seldom seen outside of an actual recession. In December 2007, the month that the 2007-to-2009 recession began, economists assigned a 38% probability. In February 2020, when the last recession began, they assigned a 26% probability.”
The latest survey’s results showed a marked increase in economists’ forecast for inflation, which they see ending the year at 7%, up from 5.5% in the April survey. The poll of 53 economists was conducted June 16 to 17, after the Fed voted to sharply raise the benchmark federal-funds rate by 0.75 percentage point to a range between 1.5% and 1.75%.
Economists expect unemployment to rise as the Fed raises rates, although they see it staying at relatively low levels by historical comparison. On average, they forecast unemployment rising from 3.6% in May to an average of 3.7% at the end of 2022 and 4.2% at the end of 2023.
One Bright Spot
The WSJ says one bright spot is that economists still expect the economy to grow this year, although they slashed their growth projection in half in the most recent survey.
On average, they see inflation-adjusted gross domestic product rising 1.3% in the fourth quarter of 2022 from a year earlier, down from 2.6% in the April survey. Last year the economy grew 5.5%, the fastest since 1984, following a 2.3% drop in 2020 when the pandemic began.
The Long Road to 2%
Federal Reserve Bank of Cleveland President Loretta Mester said the risk of a recession in the U.S. economy is increasing, and that it will take several years to return to the central bank’s 2% inflation goal. Treasury Secretary Janet Yellen said Sunday that “unacceptably high” prices are likely to stick with consumers through 2022 and that she expects the U.S. economy to slow down, “But I don’t think a recession is at all inevitable.”
Meanwhile, an economic model maintained by Federal Reserve Bank of New York economists suggests the chance of achieving a “soft landing” for the U.S. economy is just 10%.
“According to the model, the probability of a soft landing — defined as four-quarter GDP growth staying positive over the next ten quarters — is only about 10%,” the economists wrote in a blog post published Friday on the bank’s website. “Conversely, the chances of a hard landing — defined to include at least one quarter in the next ten in which four-quarter GDP growth dips below -1%, as occurred during the 1990 recession — are about 80%.”
In the blog post, the New York Fed economists noted that the “model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process.”
Is Trouble Brewing for the Farm Economy?
For the first time since September 2020, the rural economy is showing signs of weakness. That’s according to the June Rural Mainstreet Index (RMI) from Creighton University.
For June 2022, the RMI sits at 49.8. That is down from May’s 57.7. The index ranges between 0 and 100 with a reading of 50 representing growth neutral and is generated by a monthly survey of bank CEOs in rural areas of a 10-state region dependent on agriculture and/or energy.
Bankers were asked their U.S. recession expectations for the next 12 months. Approximately 92.9% rate the likelihood of a U.S. recession above 50%. Only 7% rated a recession probability below 50%.
“There is an escalating likelihood of a U.S. recession as early as the second half of 2022,” says Ernie Goss, Creighton University economist. “I expect the inflation rate to cool in the third quarter of 2022. However, the year-over-year rate will remain above 7%.”