US heading for shallow recession – Reuters poll

“The US economy is heading for a short, shallow recession over the next year“, according to economists polled by Reuters. The survey also reports that economists unanimously expect the US Federal Reserve to opt for a smaller 50 basis point interest rate hike on December 14.

Main conclusions

The Fed has at least another half point left to raise rates early in the new year, with inflation still well above the Fed’s 2% target, even though economists place in a 60% probability of a recession in 2023.

After raising the federal funds rate 75 basis points at each of the previous four meetings, the 84 economists surveyed between December 2-8 expected the central bank to raise half a percentage point this time, to 4.25%-4.50%..

Although the central bank is only aiming to cause some pain and not a full-blown recession, economists, who are often slow to forecast recessions, increased the probability of one in two years from the previous 63% to 70%.

This suggests that investors and stock markets have been ahead of events with optimism last month that the world’s largest economy could avoid recession entirely. This is already being reflected in safe haven dollar flows into the US dollar.

Although the fed funds rate is expected to peak at 4.75%-5.00% early next year, according to interest rate futures, a third of economists, 24 of 72, expect it to go higher.

About 60% of economists, 27 of 45, who provided quarterly forecasts for gross domestic product (GDP), forecast a contraction for two straight quarters or more at some point in 2023.

A large majority of economists, 35 out of 48, said the recession would be short and shallow. Eight said it would be long and shallow, while four said there would be no recession. One said it would be short and deep.

More than 75% of economists, 29 of 38, who responded to a separate question said the risk to their GDP forecasts was skewed to the downside.