Only a quarter of business professionals and economists predict that the U.S. will enter a recession this year. Also, any recession would probably be caused by an outside shock, like a confrontation with China, rather than by local economic issues like rising interest rates.
These forecasts suggest that an external shock is more likely to trigger any economic downturn rather than domestic factors such as interest rates. However, respondents to a National Association of Business Economics study that was made public on Monday still believe that through 2024, annual inflation would rise beyond 2.5%, which is the Federal Reserve's target rate of 2%.
Economic Risks from Internal Factors Lessen
One year ago, the consensus anticipation was that the U.S., the world's largest economy, would plunge into a recession amid rising interest rates and inflation. The Federal Reserve, between March 2022 and July 2023, hiked up its benchmark interest rate by 11 increments, taking it to a level last witnessed during the late 1990s or early 2000s.
Despite inflation decreasing from 9.1% in June 2022 to 3.4% in December, the economy persisted in expanding and generating employment amidst increased borrowing costs. This unexpected combination of falling inflation and persistent growth has rekindled hope that the Fed can achieve a soft landing while eliminating inflation without causing a recession.
Too restrictive, up from the 14% who expressed that view in August. Still, 70% say the Fed has it "about right”.
Business forecasters in the NABE survey
The Federal Reserve has ceased raising interest rates and signaled three anticipated rate reductions for this year. However, an increasing number of business forecasters believe the Fed is maintaining interest rates excessively high, with 21% expressing that view in the NABE survey, up from 14% in August.
Political Tensions Threatens Economy
The economists' major concerns lie beyond domestic factors. Almost two-thirds consider a conflict between China and Taiwan, even if it doesn't escalate to war, as a "moderate probability" risk. Likewise, 97% view at least a moderate likelihood that conflict in the Middle East will drive oil prices above $90 per barrel ($77 currently) and disrupt global shipping. 85% percent of people express concern over political instability in the U.S. prior to or following the November presidential election.
In addition to these concerns, business economists express growing unease over U.S. government finances, with 57% advocating more disciplined budget policies. According to the survey results, the essential goals of government budgeting strategy encompass both promoting mid-term to long-term expansion of the economy (45%) and working towards decreasing the federal deficit and debt load (42%). Reducing income inequality comes in a distant third, with 7% of respondents prioritizing this objective.
Challenges that the U.S. Needs to be Wary of
This newfound optimism regarding the economy's future, however, is not without challenges. External factors such as political tensions and potential conflicts pose significant threats that could upend the economic recovery.
The Federal Reserve's ability to achieve a soft landing remains uncertain, and its ongoing rate reduction strategy may face opposition if inflation shows signs of rebounding or if external shocks materialize. Moreover, political instability within the United States could deter investors and dampen business confidence, potentially derailing growth prospects.
The evolving geopolitical landscape and increasing awareness of U.S. government finances add further uncertainty to the economic outlook. A potential conflict between Taiwan and China could result in supply chain disruptions, causing shortages of critical components and raw materials. Additionally, rising oil prices and political instability in the Middle East could disrupt global shipping and further exacerbate inflationary pressures.
