Economists Now Expect a Recession, Job Losses by Next Year
Majority think Federal Reserve will start cutting rates in late 2023 or early 2024
Majority think Federal Reserve will start cutting rates in late 2023 or early 2024
The U.S. is forecast to enter a recession in the coming 12 months as the Federal Reserve battles to bring down persistently high inflation, the economy contracts and employers cut jobs in response, according to The Wall Street Journal’s latest survey of economists.
On average, economists put the probability of a recession in the next 12 months at 63%, up from 49% in July’s survey. It is the first time the survey pegged the probability above 50% since July 2020, in the wake of the last short but sharp recession.
Their forecasts for 2023 are increasingly gloomy. Economists now expect gross domestic product to contract in the first two quarters of the year, a downgrade from the last quarterly survey, whereby they penciled in mild growth.
On average, the economists now predict GDP will contract at a 0.2% annual rate in the first quarter of 2023 and shrink 0.1% in the second quarter. In July’s survey, they expected a 0.8% growth rate in the first quarter and 1% growth in the second.
Employers are expected to respond to lower growth and weaker profits by cutting jobs in the second and third quarters. Economists believe that non farm payrolls will decline by 34,000 a month on average in the second quarter and 38,000 in the third quarter. According to the last survey, they expected employers to add about 65,000 jobs a month in those two quarters.
Forecasters have ratcheted up their expectations for a recession because they increasingly doubt the Fed can keep raising rates to cool inflation without inducing higher unemployment and an economic downturn. Some 58.9% of economists said they think the Fed will raise interest rates too much and cause unnecessary economic weakness, up from 45.6% in July.
“‘Soft landing’ will likely remain a mythical outcome that never actually comes to pass,” said Daniil Manaenkov, an economist at the University of Michigan. A soft landing occurs when the Fed tightens monetary policy enough to reduce inflation, but without causing a recession.
“The coming drag from higher rates and stronger dollar is enormous and will knock off about 2.5 percentage points from next year’s GDP” growth, said Aneta Markowska, chief economist at Jefferies LLC. “In light of this, it’s hard to imagine how the U.S. can avoid a recession.”
Economists’ average forecasts suggest that they expect a recession to be relatively short-lived. Of the economists who see a greater than 50% chance of a recession in the next year, their average expectation for the length of a recession was eight months. The average postwar recession lasted 10.2 months.
For the year as a whole, they expect the economy to grow 0.4% in 2023, through the fourth quarter compared with the fourth quarter of the prior year. In 2024, they see the economy growing 1.8%.
Still, forecasters expect the labor market to weaken in the months and years ahead. They predict the unemployment rate, which was 3.5% in September, will rise to 3.7% in December and 4.3% in June 2023. Economists’ average forecast for the jobless rate at the end of next year is 4.7%, and they expect it to stay broadly at that level through 2024. While a 4.7% unemployment rate is low by historical comparison and indicative of the current worker shortage, it suggests that the Fed’s efforts to bring down inflation will inflict some pain on workers.
“The Federal Reserve is choosing between the lesser of two evils—take a recession with a rise in unemployment today or risk a more corrosive and entrenched inflation taking root,” said Diane Swonk of KPMG. “The risks of a misstep are large given the sins that low rates likely papered over,” she added.
The past few years have been volatile for the U.S. economy as it faced shocks including the Covid-19 pandemic and Russia’s invasion of Ukraine. In 2019, before the pandemic hit, the economy grew 2.6%. GDP contracted 1.5% in 2020 and bounced back strongly in 2021, posting 5.7% growth. This year, as consumers and businesses grapple with high inflation and supply-chain issues, economists expect the economy to eke out growth of just 0.2%.
Interest-rate increases by the Fed are expected to further slow demand for housing next year. Economists expect home prices to decline 2.2% in 2023, measured by the U.S. Federal Housing Finance Agency’s seasonally adjusted purchase-only house price index. That would mark the first such decline since 2011.
The Fed has raised its benchmark federal-funds rate by 0.75 point at each of its last three meetings, most recently in September, bringing the rate to a range of 3% to 3.25%. Another uncomfortably high inflation reading for September is likely to keep the Federal Reserve on track to increase interest rates by 0.75 percentage point at its meeting next month.
Economists on average expect the Fed to lift the federal-funds rate to 4.267% in December, which implies at least one more increase of 0.5 point that month. They see the federal-funds rate peaking at 4.551% in June next year.
Most economists expect that the Fed will eventually have to reverse course and start cutting rates late next year or in early 2024. Some 30% of economists expect the central bank to lower rates in the fourth quarter of 2023, and 28.3% expect the next rate cut in the first quarter of 2024.
The survey of 66 economists was conducted Oct. 7 to 11. Not every economist answered every question.
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U.K.-listed mining giant’s chairman says the proposal undervalues the company
LONDON— Anglo American on Friday rejected a $39 billion takeover proposal from rival BHP, saying the bid “significantly undervalues” the company and setting the stage for a potential bidding war.
London-listed Anglo American said the unsolicited proposal, which was made earlier this month and which became public this week, features an unattractive structure that is too uncertain and complex .
Anglo American Chairman Stuart Chambers said the company stands to benefit from its portfolio of assets, including copper, that are likely to experience growth from trends around the energy transition. BHP’s bid, Chambers said, is opportunistic and dilutive for shareholders.
BHP’s all-share offer valued Anglo American at about $38.8 billion, and would have been contingent upon Anglo American spinning off shareholdings in two South African-listed units. The proposal represented a premium of about 31%, not including the South African-listed units, based on Tuesday’s closing prices.
Some analysts had predicted Anglo would find the bid too low and are expecting BHP to return with another. BHP has until May 22 to make a firm offer, though the deadline can be extended. Industry participants expect other large miners to also take a run at Anglo, whose share price has dropped since 2022 as lower commodity prices have ripped through the industry.
A tie-up between BHP and Anglo American, which would be the largest mining deal on record, would illustrate the growing importance of copper, a metal essential to clean-energy products , to a sector that has long relied on Chinese industrialisation to boost profits.
Copper represents some 30% of Anglo American’s output, while BHP counts a majority stake in Chile’s Escondida, the world’s biggest copper mine, among its assets. BHP bought Australian copper-and-gold miner Oz Minerals for $6.34 billion in May last year, representing its biggest acquisition since 2011.
Copper prices are up some 15% so far this year, reflecting expectations that demand for the metal will rise as the world decarbonises and supply will be constrained. Electric vehicles and wind farms use copper in much greater quantities than gasoline-powered cars and coal-fired power stations.
Anglo American has been reviewing its assets in recent months, and has held early conversations with potential buyers for its storied De Beers diamond unit, which it values at more than $7 billion, The Wall Street Journal reported Thursday.
Activist firm Elliott Investment Management holds a stake in Anglo American worth roughly $1 billion, accumulated over several months and before BHP’s move on the miner, according to a person familiar with the matter. The firm is widely known for its campaigns to push companies for change to boost their stock prices. Its view of the Anglo American holding couldn’t be learned.
That said, a jump in Anglo American’s share price following BHP’s takeover offer indicates Elliott has already profited from its holding, potentially reducing any incentive for it to take any action until the outcome of BHP’s bid becomes clearer.
Anglo’s stock on Friday traded above the implied value of BHP’s offer, indicating the market expects a higher bid to emerge.
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