Looks like the Federal Reserve’s strategic tightening policy might engineer the US economy into a soft landing, or better still, avoid a recession altogether. Most experts are finally seeing the recession concerns that were looming on 2023, dissipate.
How experts are weighing in
If one can recall, the US economy added 517,000 total nonfarm payrolls in January, significantly higher than the 188,000 that the Street had expected. Also, unemployment rate dipped slightly to 3.4 percent, which was lower than the Street’s expectations of 3.6 percent. These numbers form a different picture than what the Fed was trying to paint.
Despite concerns that the Fed will tighten the belt harder on its monetary policy in order to bring the labor market to its knees and contain wage inflation, experts are increasingly beginning to look at an easier-than-expected economic scenario in 2023.
In an interview with Fox Business on February 3, Jeremy Siegel, a professor emeritus of finance at the Wharton School, expressed concerns that the strength of the US labour market can push the Fed to keep interest rates high for longer.
“Continued increases will increase the risk of a recession in the second half of this year,” he said, before adding that although it is difficult to believe that the situation can turn for the worse very quickly although it is hard to believe, given the “blowout jobs report that we had Friday.”
Nonetheless, the recent update by Goldman Sachs on its US economic outlook told a different story. In a research note, the bank pointed out that the risk of a sharp economic contraction has notably diminished due to continued resilience of the US labor market and early signs of economic improvement as gathered from business surveys.
Goldman Sachs said that the probability of the US slipping into a recession in the next 12 months is now 25 percent, instead of 35 percent guided previously. This is a sharp contrast to the Reuters poll of economists in December, which put a 60 percent probability on a recession in 2023.
Additionally, following the jobs report that was released last week, the US Treasury Secretary Janet Yellen told ABC that she sees the US economy walking down a path around a recession, which was forged by a steadily declining inflation and remarkable economic resilience.
“You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years,” opined Yellen.
Another important observation made by Yellen was that the Biden administration’s steps to reduce the prices of gasoline and prescription drugs can also complement the Fed’s crackdown on inflation and help cool overall prices.
Meanwhile, Sal Guatieri, senior economist at BMO Capital Markets, was cautious in his stance.
“Nonetheless, today's report does raise serious doubts about whether the economy is slipping into recession. Of course, if job growth remains strong and labor markets tighten further, this will compromise the Fed's goal of restoring price stability, leading to several more rate hikes that would ultimately be the economy's undoing,” he said, after studying the jobs report last week.
Bottom-Line
Looking at the various data points that point towards a stubbornly strong economy, optimism is rising among experts about the same. Granted, the Fed’s continued hawkishness can turn the tables once again and slow down the economy to the verge of a recession, but for now, a year of interest rate hikes and planned slowdown did not deter the US economy from holding ground, and this strength seems to continue this year as well.
