Economic growth is on track to slow way down in the months ahead, according to an emerging consensus among forecasters. And that may be exactly what the U.S. economy needs.
Why it matters: If earlier projections of continued speedy growth were coming true, it would be mean rising, rather than falling, inflation pressures. The latest round of forecasts is more consistent with the economy downshifting toward normal.
- The bad news is that slower growth leaves the economy more vulnerable to recession, especially if some unlucky negative shocks show up.
- The good news is that it offers a possibility of falling inflation paired with lower, but still positive, growth.
By the numbers: In a survey out today from the National Association for Business Economics, the median forecaster expects 2022 GDP to rise 1.8%, compared with a median projection of 2.9% in February. (GDP growth was 5.5% in 2021.)
- That meshes with other measures of economic consensus. For example, the Philadelphia Fed’s Survey of Professional Forecasters showed 2.5% expected 2022 GDP growth in a May 13 release, down from 3.7% in February.
Those revised forecasts reflect all that has happened inz the last three months. Financial markets have started to price in more aggressive monetary tightening from the Federal Reserve, and the negative effects of the Ukraine war and China’s COVID lockdowns.
- It’s also clear that the risk of a recession has increased lately. Some 77% of participants in the NABE survey see risks tilted to the downside, and more than half see the odds of a recession in the next year at over 25%.
- But the downgrade in growth forecasts is just what policymakers are seeking as they try to bring inflation down.
The intuition: In the long run, economic growth is limited by the number of workers and gains in productivity. Fed leaders, for example, think the long-run potential growth rate of the U.S. is around 1.8%.
- Growth can surge above that for short periods, like when people are coming back to work after a recession. It can also change depending on things like immigration policies (that can bring in more workers) or technological advancements (that generate higher productivity).
But in an economy like 2022’s, with the labor market already extremely tight, growth along the lines of the 2.9% forecasters expected months ago would imply yet more of the overheating that has fueled higher prices and discontent over shortages.
What they’re saying: “The expected growth slowdown should deliver more benign inflation outcomes,” wrote JPMorgan economists in a research note last week. They cut their forecast for growth in the second half of the year to 2.4%, from 3% previously.
- They acknowledged that the link between inflation and GDP has been tenuous lately. “But directionally at least, subpar growth increases our confidence that inflation will gradually move back down toward 2%.”
Plausibly, growth could slow to something close to its 1.8% trend and stay there for a while. That would enable the labor market, housing market, and markets for goods and services to come into better balance without the economy tipping into contraction.
The bottom line: Recession risk is real, but the pullback in growth that forecasters are seeing now looks like a healthy thing.