Since the beginning of this decade, economists and financial experts all predicted that a recession would occur. The occurrence of COVID-19 gave this impression especially after the economy slowed considerably. In the first two quarters of 2020, the economy shrank to -5% and then -32.9% before surging back to 33.1% in the third quarter of 2020. Since then, the U.S. economy remained more or less strong with positive GDP from quarter to quarter.
A couple of months ago, the Federal Reserve announced that a “mild recession” will occur toward the end of the year. The Fed anticipated this in part because of the high-interest rates that are supposed to slow consumer demand. However, the recent economic data on unemployment, job creation, consumer price index…etc. show that the U.S. economy remains quite resilient as consumer demand remains strong. These are signs that we are not near a recession this year as predicted.
Indeed, economists and financial experts are now taking back their predictions on the forthcoming recession. Wells Fargo’s team of economists became the latest group to dial back its recession outlook. The firm now sees a recession hitting at the beginning of 2024 as recent economic data reveals an economy “not yet on the brink of recession.” Wells Fargo’s team of economists wrote in a note:
“While we still expect the delayed effects of monetary tightening and tighter credit availability to dampen economic growth, the economy has proven to be more resilient than we anticipated. As a result, we have pushed back our expectations for the start of economic contraction to Q1-2024.”
Wells Fargo isn’t the only one becoming more optimistic about the outlook for economic expansion in 2023. Goldman Sachs, one of the largest investment banks in the world, has cut its odds of a recession this year as well from 35% to 25% earlier this week. Michael Gapen, Chief Economist of Bank of America, stated that the U.S. economy is on the path of a soft landing. The Federal Reserve of Atlanta is projecting the U.S. economy to grow 2.2% in the second quarter, which would mark the four-straight quarter of gross domestic product expansion. Typically, two consecutive quarters of GDP declines would be considered an official recession mark.
The recession debate comes as Wall Street wonders how the economy will react to the Federal Reserve’s most aggressive interest rate hike campaign in forty years. The economy could come down from interest rate hikes with a “hard landing” where the Federal Reserve induces a deep recession and unemployment jumps significantly, or a soft landing, where the U.S. economy only slows down slightly.
While the stock market is not the economy and the economy is not the stock market, the stock market, nonetheless, remains the forward-looking indicator, and the Nasdaq is rallying over 26% this year while the S&P500 is nearly in a bull market. It is very unlikely that the hard-hitting recession that was anticipated for this year will ever take place.