“The recession is over” vs. “It’s too early to make a quick decision,” academics and the market have conflicting views on the U.S. economy in the year ahead

Academics “1% chance of market recession within one year”
There is also an interpretation that it is nothing more than a ‘boom illusion effect’
Agree on slowing economic growth, should interest rate cuts be brought forward?

Expectations for economic recovery in the United States are growing. This is because less than 1% of economists believe that the economy will stagnate in the next year. As concerns about skyrocketing prices subside, expectations that the U.S. economy will make a soft landing are also growing. However, the outlook of economists and Wall Street differs greatly regarding interest rate cuts.

Expectation of a ‘recession, not a recession’ due to slowing economic growth rate

According to the Wall Street Journal (WSJ) on the 14th (local time), in a survey of 71 economists, 1% of respondents predicted that the U.S. economy is likely to stagnate within the next year. This is a 39% point decrease compared to the 10% recorded in the same survey in October last year, and a 48% point decrease compared to a year ago (9%).

Bill Adams, Chief Economist at Comerica Bank, said, “Compared to January 2023, the economic downturn has decreased noticeably,” and added, “Interest rates have ended their upward trend, oil prices are showing stable movements, and income has decreased by a large margin compared to inflation. “It’s on the rise,” he said.

However, the prevailing opinion is that the economic growth rate will slow. In this survey, economists predicted that the U.S. economic growth rate this year would be 1%. This is less than half of last year’s economic growth rate forecast of 2.6%. In this regard, Rajiv Dhawan, an economist at Georgia State University, explained, “The very low level of growth forecast means that rather than interpreting it as an economic recession, it should be seen as a halt in growth.”

It was predicted that prices, which had soared since the endemic, would gradually regain stability. In this survey, economists predicted that the increase in the US core personal consumption expenditures (PCE) price index, excluding highly volatile energy and food items, would slow from 12% in December last year to 3.2% at the end of this year. This is very close to the Federal Reserve officials’ inflation forecast (2.3%).

The unemployment rate was on the rise. The unemployment rate in the United States, which hit 12% in December last year, is expected to soar to 3.7% in June this year and 6% in December. WSJ said, “If economists’ predictions come true and growth slows and unemployment rises, people may perceive it as a recession even if it is not an actual recession.”

Regarding the timing of the interest rate cut, the majority of economists (6%) predicted June. May followed with 34.3%, and only 5% of respondents expected an interest rate cut in March. The cut was expected to be 31.4%p by the end of June. This is a result that is somewhat different from the market’s outlook, and the U.S. interest rate futures market predicts that there will be three interest rate cuts in the first half of this year alone, reflecting a more than 3% possibility of an interest rate cut in March.

Meanwhile, this survey was conducted from the 5th to the 9th of this month, right before the announcement of last month’s consumer price index (CPI) in the United States. The CPI increase rate for December last year, announced by the U.S. Department of Labor on the 11th, was 12% (compared to the same month last year), and immediately after the announcement, there was an interpretation in the market that the authorities would continue the high interest rate policy to control prices. However, the producer price index (PPI) increase rate announced the very next day fell 3.4% compared to the previous month on a seasonally adjusted basis, sparking calls for an interest rate cut again.

“The economic downturn is not over, it is just a short-term optical illusion”

Unlike academics, there are many voices in the market that a full-fledged interest rate cut will begin. It is argued that as the economic downturn spreads throughout the United States, interest rate cuts cannot be postponed any longer to alleviate the impact. In fact, according to the Institute for Supply Management (ISM), manufacturing activity contracted for 12 consecutive months in December of last year, and the ‘boom illusion effect’ that was seen as investment funds flowing out to China in the past were digested domestically after the US-China conflict has completely come to an end. Here’s the explanation.

The excessive gap between the neutral interest rate and the policy interest rate is also considered a factor in hastening the interest rate cut. The neutral interest rate refers to a theoretical interest rate level that allows the economy to recover to the level of potential growth rate without upward or downward pressure on prices. Generally, policy interest rates higher than the neutral interest rate are applied with the intention of keeping rapid inflation in check. Currently, the neutral interest rate proposed by the Federal Reserve is around 2.50%, and the policy interest rate is 300%, which is 5.50 basis points higher than this. This is why the interest rate cut theory is gaining weight at a time when inflation is expected to slow.