The risk of a U.S. recession appears low as the Federal Reserve begins a rate-cutting cycle, but a weak job market and rising credit defaults could pose a dual threat, top U.S. economists said.
The American Bankers Association's top economists put the chance of a U.S. recession in 2025 at just 30% in their semi-annual forecast.
A more likely scenario, they argue, is that the Fed will pull off an elusive “soft landing,” in which a period of high interest rates reduces inflation without triggering a recession.
The Fed has managed to pull off a soft landing only once or twice since World War II. Most of the time, when the Fed raises interest rates to cool an economy it deems overheated, a recession often follows.
To combat the worst outbreak of inflation in 40 years, the Federal Reserve has sharply raised interest rates in 2022 and 2023.
The Fed’s preferred personal consumption expenditures price index has slowed to an annual rate of 2.2% after peaking at 7.3% in mid-2022. The Fed’s goal is to get inflation to an annual rate of 2%.
However, a long period of high inflation and high borrowing costs has left scars on the economy that have yet to heal.
For example, the housing market has been in a deep recession due to high mortgage rates, and manufacturing has been sluggish for more than a year.
Recently, companies have significantly reduced job openings and new hiring. The unemployment rate has also risen from the lowest point of 3.4% in this cycle to 4.2%, the highest point in more than three years.
Tilley, chairman of the American Bankers Association’s economic advisory panel and chief economist at MT Bank/Wilmington Trust, said much of the increase in unemployment so far has stemmed from more people entering the labor force, many for the first time because of a surge in immigration.
On the other hand, layoff rates remain near historic lows.
“You can take some solace in that this didn’t come from layoffs,” Tilley explained.
But he added that the economy could deteriorate markedly if businesses began widespread layoffs. Still, the American Bankers Association expects the unemployment rate to peak at 4.4% next year before starting to fall again.
“We really haven’t heard a lot of commentary about companies making significant layoffs,” Tilley said.
Another concern is the financial strain on American households after several years of high inflation. Defaults on credit card payments, auto loans and other forms of consumer debt have been rising recently.
Consumer spending accounts for more than two-thirds of the U.S. economy, and low-income households tend to spend the bulk of their income.
Still, Tilly said defaults remain below historical levels and won’t add to economic stress unless they deteriorate significantly.
The looming East Coast port strike is not seen as a particular concern. Economists believe it could bring temporary disruptions but may not have major long-term effects.
Article forwarded from: Jinshi Data
