More Forecasters See a Soft(er) Landing For Economy

• Economists at Deutsche Bank have softened their prediction for an imminent recession in the U.S. economy, pushing back its start date to early 2024 and predicting a milder increase in unemployment.
• The U.S. economy has stayed resilient even as the Federal Reserve has squeezed households and businesses with high interest rates in an effort to restrain inflation.
• The lack of mass layoffs has surprised economists and officials who had expected the rate hikes to cause a spike in unemployment, as typically has happened with rate hikes historically.

More decision-makers at the Federal Reserve and on Wall Street are coming around to the view that the U.S. economy can avoid a crash—or at least have a kinder, gentler recession than they once predicted.

Economists at Deutsche Bank issued a revised outlook for the economy Monday, toning down the pessimism of their previous forecast calling for a recession. The bank now expects a recession to begin at the beginning of 2024 rather than the end of 2023, and that unemployment will peak at 4.6%, compared to more than 5% in their last forecast, and up from the current level of 3.8% as of August.

Also on Monday, Michael S. Barr, vice chair of supervision for the Fed and a member of the central bank’s policy committee, added his voice to the chorus of Fed officials who have said a soft landing looks increasingly likely.1

“I now see a higher probability than I did previously of the U.S. economy achieving a return to price stability without the degree of job losses that have typically accompanied significant monetary policy tightening cycles,” Barr said in a speech at the Forecasters Club in New York, according to prepared remarks.

As high inflation raged last year in the wake of post-pandemic reopenings, some economists warned that millions of people would have to lose their jobs for consumer spending to fall. Falling consumer spending would allow supply and demand to rebalance enough that prices for everyday things would stop accelerating.

Since then, inflation has cooled (though not yet down to the 2% annual rate that policymakers at the Fed are aiming for) and unemployment has stayed low, raising hopes that the economy will have a “soft landing” rather than a crash.

That would be a historical rarity. The Fed has raised its benchmark interest rate to a 22-year high to combat inflation. In the past, high interest rates have proven to be bitter medicine for the economy, discouraging borrowing and spending so much that a recession has ensued eight out of the last nine times the Fed has gone on a rate-hike campaign.

This time around, consumer spending and employment have stayed resilient, raising the possibility for a soft landing. It is also prompting Fed officials to warn they’ll have to keep interest rates higher for longer to get inflation under control.

To be sure, the economy isn’t out of the woods. Forecasters at Deutsche Bank pointed to several forces that could make the landing less than soft: high gas prices, the return of student loan payments diverting money away from other spending, the auto worker strike, and banks growing more reluctant to lend money are among the powerful forces dragging the economy toward a recession.

“Over the past several months, the case for a soft landing has undeniably strengthened,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, together with other economists, wrote in the commentary.