JPMorgan withdraws recession prediction despite ‘very high’ risks

JPMorgan Chase economists have revised their recession forecast, aligning with other Wall Street experts who believe a contraction is no longer inevitable but acknowledge the persistence of high risks and slow growth. Despite several interest rate hikes aimed at curbing economic growth and numerous obstacles, recent data suggests the possibility of a soft landing, with projected growth of around 2.5% in the third quarter, exceeding the previous forecast of just 0.5% expansion. Michael Feroli, Chief Economist at JPMorgan, emphasized that with this level of growth, a mild contraction in the next quarter, previously projected, is unlikely.

Feroli attributed this revised outlook to positive developments such as the resolution of the debt ceiling issue in Congress, the containment of a banking crisis in March, increased productivity due to artificial intelligence implementation, and an improved labor supply despite a slowdown in hiring.

Rate risk

However, Feroli cautioned that risks remain, particularly concerning the Federal Reserve’s continued interest rate hikes. Despite 11 interest rate hikes since March 2022, totaling 5.25 percentage points, inflation remains above the central bank’s 2% target. Recession risks could materialize if the Fed persists in raising rates or if the effects of previous tightening measures take effect.

Feroli predicted that the Fed will not begin cutting rates until the third quarter of 2024, although market pricing indicates a potential rate cut as early as March 2024, according to CME Group data. Market pricing also suggests a significant chance of a recession, as demonstrated by the New York Fed indicator tracking the difference between 3-month and 10-year Treasury yields, which points to a 66% probability of contraction in the next 12 months.

Changing mood

Despite these risks, the overall sentiment on Wall Street has shifted, with Bank of America and Goldman Sachs joining JPMorgan in abandoning their recession forecasts. Bank of America now predicts growth of 2% this year, followed by 0.7% in 2024 and 1.8% in 2025. Goldman Sachs has also lowered its probability for a recession to 20%. The Federal Reserve’s GDP projections in June indicate anticipated annual growth rates of 1%, 1.1%, and 1.8%. Chairman Jerome Powell stated that the Fed’s economists no longer believe a credit contraction will result in a mild recession this year.

— CNBC’s Michael Bloom contributed to this report.