Leading economists say the U.S. will enter a recession in the coming 12 months as the Federal Reserve attempts to bring down high inflation, the economy contracts and employers cut jobs, according to an Oct. 16 report from The Wall Street Journal.
Economists place the recession probability in the next 12 months at 63 percent, up from 49 percent in the Journal's July survey. This is the first time since July 2020 that the recession probability has been above 50 percent, according to the report.
Interest rate increases by the Fed are expected to slow housing demand, with home prices expected to decline by 2.2 percent in 2023, the first decline since 2011.
"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," Diane Swonk, chief economist at KPMG, told the Journal. "The risks of a misstep are large given the sins that low rates likely papered over."
U.S. gross domestic product is forecast to contract at 0.2 percent annually in the first quarter of 2023 and shrink by 0.1 percent in the second quarter. The new forecast differs from the July survey that showed an estimated 0.8 percent growth rate in the first quarter and 1 percent growth in the second quarter.
"The coming drag from higher rates and [a] stronger dollar is enormous and will knock off about 2.5 percentage points from next year's GDP. In light of this, it's hard to imagine how the U.S. can avoid a recession," said Aneta Markowska, chief economist at Jefferies LLC.
Economists forecast the labor market will weaken, predicting the unemployment rate will rise to 3.7 percent in December and 4.3 percent in June 2023.
In 2021, the economy grew by 2.6 percent. The U.S. GDP contracted 1.5 percent in 2020 but bounced back in 2021, posting 5.7 percent growth. As consumers and businesses grapple with high inflation and supply-chain issues this year, experts expect the economy to measure growth of just 0.2 percent.