JPMorgan Scraps U.S. Recession Call Amid Spreading Optimism

JPMorgan Chase & Co. economists scrapped their call for a recession in the U.S., joining a growing number of forecasters who now expect the economy to avert the downturn that was once viewed as inevitable. 

The bank, which had previously said it expected a recession to begin in 2023, now sees continued expansion this year and “modest, sub-par growth” in 2024 as the most likely scenario. Michael Feroli, JPMorgan's chief U.S. economist, flagged the rising possibility of “healthy non-inflationary growth” thanks to potential productivity gains from artificial intelligence and a pickup in labor supply. 

“The likelihood of a contraction has diminished in recent months,” Feroli wrote Friday in a note to clients. “A relatively quick resolution of the debt ceiling has taken one type of financial crisis risk off the table,” while “regulators' implicit guarantee of bank depositors has vastly reduced the odds of a different type of financial crisis risk,” he said.

Earlier this week, Bank of America Corp. became the first large Wall Street bank to officially reverse its call amid growing optimism about the economic outlook. Both decisions followed a similar change in tune among the Federal Reserve's own economists in July.

JPMorgan now expects U.S. GDP to grow at a “healthy” 2.5% annualized pace in the current quarter, followed by 1.5% in the fourth quarter. Feroli still anticipates the unemployment rate will climb to 4.5% by the end of next year, a full percentage point above where it is now.

Little Scarring

Relative to the global financial crisis, “the pandemic left little scarring in capital deepening, and companies have started to invest again, possibly paving the way for a long, low-inflation expansion to come,” Feroli wrote. 

More generally, the note pointed to the continued resiliency of the U.S. economy in recent months alongside a gradual moderation in core inflation. Wage growth, meanwhile, has also eased without a corresponding rise in unemployment. Still, Feroli emphasized risks to the outlook remain.

“While a recession is no longer our modal scenario, risk of a downturn is still very elevated. One way this risk could materialise is if the Fed is not done hiking rates,” he said. “Another way in which recession risks could materialise is if the normal lagged effects of the tightening already delivered kick in.”

The July jobs report, out earlier Friday, emphasised the enduring strength of the labour market, further fueling hopes for a so-called soft landing. Employers added jobs at a solid pace, and the unemployment rate fell back down to 3.5%, one of its lowest readings in decades. 

Monthly inflation data due Aug. 10 is forecast to show consumer prices, excluding food and energy, increased just 0.2% in July, which would mark the smallest back-to-back increases in over two years following a similar reading in June.

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