Labor market could circumvent US recession (NABE)

A majority of business economists believe that the US economy will continue to slow and slide into recession next year, but the impact on the labor market could be limited compared to recent downturns.

That’s according to the results of a new survey released Monday by the National Association for Business Economics (NABE), which showed that 57% of respondents believe the likelihood of a recession in 2023 is greater than 50%. A majority of 52% of economists who responded believe a recession will begin in the first quarter of 2023.

The survey, which was conducted Nov. 7-18, pointed to the Federal Reserve’s continued monetary policy tightening in an effort to rein in inflation as the biggest challenge facing the economy. When asked to identify the biggest downside risk to the economy, 65% of respondents cited too much monetary tightening.

A similar question was asked about the biggest upside risk, and 50% of respondents identified the Fed achieving its desired “soft landing” by bringing inflation under control without a severe recession. Economists surveyed were skeptical of the likelihood of a soft landing, with 77% estimating the likelihood of a soft landing at 50% or less.

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Survey respondents expect monthly employment growth to slow over the next year, but do not expect payrolls to contract. The panel expects monthly job gains to fall from an average of 370,000 in 2022 to just 76,000 in 2023 – with the smallest gains in the first part of next year. The Labor Department’s latest jobs report, released on Friday, found employers added 263,000 jobs in November.

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The slowdown in labor market growth is expected to correspond with a rise in the unemployment rate, although it is still expected to remain at a lower level than in previous economic recessions according to the NABE survey.

A majority of 56% of respondents believe the unemployment rate will peak at 5% or lower, while 17% believe it will reach 5.5% or higher, which would be similar to the unemployment rate in past recessions. The jobless rate was unchanged month over month at 3.7% in the latest jobs report.

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The Federal Reserve’s battle against inflation is not likely to end in the near future based on the results of the NABE report: 44% of economists surveyed expect inflation not to fall to the target rate of the Fed by 2% year-on-year. annual inflation through 2024, while another 42% believe the Fed won’t reach that target until 2025 or later.

Economists surveyed expect more aggressive interest rate hikes from the Fed next year compared to their expectations in the latest NABE report, released in October.

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Two months ago, the panelists’ median estimate expected the federal funds rate target to peak at 4.25% in the first quarter of 2023 before declining to 3.875% in the final two quarters. According to respondents’ latest forecasts, the target federal funds rate would peak at a median of 4.875% in the first half of 2023 and then slowly decline to 4.625% in the fourth quarter of 2023.

“The more subdued outlook coincides with substantially higher expectations for interest rates at the end of this year and next,” said Dana Peterson, NABE Outlook survey chair and Conference Board chief economist. “Panelists expect job growth to slow in the first three quarters of 2023, but remain positive.”