The Wall Street Journal's latest quarterly survey of business and academic economists shows that despite some signs of weakness in recent data, forecasters remain optimistic about the outlook for the U.S. economy.

The chart below shows what economists think now about the economy in recent months and in the coming years.

The economy is normalizing

Economists have been underestimating the strength of the U.S. economy for about two years, with their expectations for growth falling short of actual growth.

That has changed recently, with U.S. economic growth falling short of expectations in the first three months of the year. Still, most economists believe a slowdown is inevitable after a period of rapid expansion and excessive inflation. They believe the economy is normalizing, not deteriorating.

Expectations for GDP (red dots are average expectations, the same below)

The employment environment has returned to a more stable level

In another change, the recent climb in the unemployment rate (from 3.4% at the beginning of 2023 to 4.1% in June) was also slightly faster than economists expected.

While job growth remains solid, demand for workers appears to be cooling, thanks in part to an increase in immigration. Economists are again optimistic that this represents a return to a more stable employment environment and they do not expect the unemployment rate to accelerate.

Expectations for unemployment

Progress in fighting inflation is steady but slow

The survey closed on July 9, two days before consumer price index data showed a sharp slowdown in inflation in June. This may partly explain why economists' inflation forecasts have been slightly raised since the last survey in early April.

The difference is slight, however. The current forecast, like previous ones, shows economists’ strong confidence that the Fed will succeed in achieving its 2% inflation target. The question is how to get there.

Expectations for Core PCE

Higher interest rates for longer

A recent rise in unemployment and a drop in inflation have rekindled investor hopes that the Federal Reserve could cut interest rates as many as three times this year, most likely starting in September.

Still, the recent good news on inflation comes on the heels of a string of disappointing data, including one released just after the April survey closed. As a result, the latest economist survey suggests interest rates will rise slightly.

The dispersion of interest rate forecasts reflects economists' optimistic expectations for the economy. If there are concerns about a recession, the Fed may be more aggressive in cutting interest rates.

However, 22% of respondents believe that interest rates will fall below 3.75% by June 2025, compared with 25% who held this view in April.

Expectations for the federal funds rate

The article is forwarded from: Jinshi Data