‘Envy of the World’—U.S. Economy Expected to Keep Powering Higher
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‘Envy of the World’—U.S. Economy Expected to Keep Powering Higher

Economists lift their growth forecasts in latest Wall Street Journal survey

By SAM GOLDFARB
Tue, Apr 16, 2024 3:31pmGrey Clock 4 min

It has been two years since forecasters felt this good about the economic outlook.

In the latest quarterly survey by The Wall Street Journal, business and academic economists lowered the chances of a recession within the next year to 29% from 39% in the January survey . That was the lowest probability since April 2022, when the chances of a recession were set at 28%.

Economists, in fact, don’t think the economy will get even close to a recession. In January, they on average forecast sub-1% growth in each of the first three quarters of this year. Now, they expect growth to bottom out this year at an inflation-adjusted 1.4% in the third quarter.

Just 10% of survey respondents think the economy will experience at least one quarter of negative growth over the next 12 months, down from 33% in January.

The Wall Street Journal survey was conducted from April 5 to 9, just before the release of March consumer-price index data showing inflation running hotter than economists had anticipated.

The U.S. economy has far outperformed expectations over the past year and a half. Instead of stumbling under the weight of the Federal Reserve’s most aggressive interest-rate-raising campaign in four decades, it has continued expanding at a robust clip.

Few think that the economy can do quite as well as last year’s 3.1% growth, as measured by the seasonally adjusted fourth-quarter change from a year earlier. That figure might have been boosted by one-time factors such as federal infrastructure and semiconductor legislation and an uptick in immigration , which also might not last.

Still, economists have had to rethink forecasts for a major slowdown as more time has passed and one still doesn’t seem imminent. Economists on average think the economy grew at a 2.2% rate in the first three months of the year, up from a 0.9% forecast in January.

“The U.S. economy is performing very well,” EconForecaster economist James Smith said in the survey. “We’re truly the envy of the world.”

Much has changed since economists were last this optimistic. Two years ago, the Fed’s benchmark federal-funds rate was set between 0.25% and 0.5%. Inflation was high but economists still generally thought that it could come down without too much help from the Fed. They forecast steady growth and the midpoint of the range for the fed-funds rate topping out at just above 2.5%.

Now, the fed-funds rate is sitting between 5.25% and 5.5%, and economists don’t see a bunch of cuts coming soon. Many analysts trimmed their rate-cut forecasts after last week’s hot inflation report. But even before the report, survey respondents predicted that rates would end the year at 4.67%, implying three cuts. In January, their responses suggested that they thought four or five cuts were likely.

Economists now think the economy can withstand higher rates than they did not long ago.

They expect the 10-year Treasury yield—a key borrowing benchmark that was around 4.4% at the time of the survey—to end 2024 at 3.97%. Looking further into the future, they expect the yield to end 2026 at 3.78%. That is slightly above even their forecast last October, when the yield was higher than it is now.

Many economists have long thought that the economy can handle higher interest rates when it is capable of growing faster, and particularly when worker productivity has increased.

To that end, economists expect the Labor Department’s measure of productivity to rise at an annual rate of 1.9% over the next decade. That matches the annual increase in productivity over the last 40 years. But it is above the 1.2% pace of the 2010s, when the 10-year Treasury yield was typically stuck between 1.5% and 2.5%.

Some economists are now enthusiastic about the economy’s longer-term potential.

“We think that the American economy has entered a virtuous cycle where strong productivity results in growth above the long-term trend, inflation between 2% and 2.5% and an unemployment rate between 3.5% and 4%,” RSM US chief economist Joe Brusuelas said in the survey.

Many aren’t quite as optimistic. One downside of a better growth outlook is that a stronger economy could make it harder for inflation to fall all the way back to the Fed’s 2% target.

An inflation gauge that is closely watched by the Fed, the core personal-consumption expenditures price index, was 2.8% in February, its most recent reading. Economists now expect it to end the year at 2.5%, after having forecast 2.3% in January.

Economists, on average, believe that core PCE inflation will fall to 2.1% by the end of next year without a recession. However, their projections might already have ticked higher after last week’s price data, and some continue to worry that the Fed’s efforts to control inflation still present a major threat to the economy.

“The risks are clearly skewed toward more hawkish Fed outcomes, which could drag on our growth forecasts,” Deutsche Bank economists Brett Ryan and Matthew Luzzetti said in the survey.

The Wall Street Journal survey was answered by 69 economists. Not every economist responded to every question.



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CBA economist Stephen Wu noted the April data was above the bank’s forecast of 3.5 percent as well as the industrywide consensus forecast of 3.4 percent. He predicts the next leg down in inflation won’t be until the September quarter, when we will see the effects of electricity rebates and a likely smaller minimum wage increase to be announced by the Fair Work Commission next month compared to June 2023.

The most significant contributor to the April inflation rise were housing costs, which rose 4.9 percent on an annual basis. This reflects a continuing rise in weekly rents amid near-record low vacancy rates across the country, as well as significantly higher labour and materials costs which builders are passing on to the buyers of new homes, as well as renovators.

The second biggest contributor was food and non-alcoholic beverages, up 3.8 percent annually, reflecting higher prices for fruit and vegetables in April. The ABS said unfavourable weather led to a reduced supply of berries, bananas and vegetables such as broccoli. The annual rate of inflation for alcohol and tobacco rose by 6.5 percent, and transport rose by 4.2 percent due to higher fuel prices.

Robert Carnell, the Asia Pacific head of research at ING, said they no longer expect a rate cut this year after seeing the April data. Mr Carnell said an increase in trend inflation was apparent and “rate cuts this year look unlikely”. In the RBA’s latest monetary policy statement, published before the April CPI was released, it said: “Inflation is expected to be higher in the near term than previously thought due to the stronger labour market and higher petrol prices. But inflation is still expected to return to the target range in the second half of 2025 and to reach the midpoint in 2026.”

 

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