JPMorgan Chase economists ditched their recession call on Friday, joining a growing Wall Street chorus that now thinks a contraction is no longer inevitable.
While risks are still high and future growth is likely to be slow, the bank’s forecasters believe the data flow suggests a soft landing is possible. That comes despite a series of rate hikes implemented with the express intention of slowing the economy, and several other substantial headwinds.
Michael Feroli, chief economist at the nation’s largest bank, told clients that recent figures point to growth of about 2.5% in the third quarter, compared with JPMorgan’s previous forecast for growth of just 0.5%.
“Given this growth, we doubt the economy will lose momentum quickly enough to enter a mild contraction as early as next quarter, as we previously expected,” Feroli wrote.
Along with positive data, he pointed to resolving the debt ceiling impasse in Congress, as well as managing a banking crisis in March, as potential headwinds that have since been removed.
He also noted productivity gains, partly due to the wider implementation of artificial intelligence, and an improved labor supply, even as hiring has declined in recent months.
However, Feroli said the risk is not completely off the table. He specifically mentioned the danger of the Fed’s policy, which has implemented eleven interest rate increases since March 2022. Those increases total 5.25 percentage points, but inflation is still well above the central bank’s target of 2%.
“While a recession is no longer our average scenario, the risk of a recession is still very high. One way this risk could materialize is if the Fed does not finish raising rates,” Feroli said. “Another way in which the risks of a recession could materialize is if the normal lagged effects of the tightening already in place kick in.”
Feroli said he does not expect the Fed to start cutting rates until the third quarter of 2024. Current market prices indicate that the first reduction could come as soon as March 2024, according to data from the CME Group.
Market prices also point strongly towards a recession.
A New York Fed indicator that tracks the difference between 3- and 10-year Treasury yields points to a 66% chance of a contraction over the next 12 months, according to an update on Friday. The so-called inverted yield curve has proven to be a reliable recession predictor with data going back to 1959.
However, the mood on Wall Street about the economy has changed.
Earlier this week, Bank of America also threw in the towel on its recession call, telling customers that “recent incoming data has caused us to reassess the forecast.” The company now sees growth of 2% this year, followed by 0.7% in 2024 and 1.8% in 2025.
Goldman Sachs also recently lowered the chance of a recession from 25% to 20%.
The Federal Reserve’s GDP projections in June pointed to respective annual growth levels above 1%, 1.1% and 1.8%. Chairman Jerome Powell said last week that Fed economists no longer think a credit contraction will lead to a mild recession this year.
— CNBC’s Michael Bloom contributed to this report.