Wall Street’s forecasts move sharply lower

Compared with six months ago, U.S. securities industry economists are much gloomier on the economy amid soaring inflation and rising interest rate expectations.

The Securities Industry and Financial Markets Association (SIFMA) published its latest semi-annual survey of the chief U.S. economists, which reported that the median GDP forecast for the current year was just 1.5%, rising to 1.7% next year. This represented a sharp drop from the previous median forecasts of 5.2% and 3.5% growth, respectively.

Opinion on the prospect of a U.S. recession was fairly evenly divided, with about 18% of respondents saying there will be no recession, and similar proportions seeing recession in the second half of 2022, in 2024 or beyond 2024. Over one-quarter foresaw a recession in 2023 (9% in the first half, and 18% in the second half).

SIFMA reported that the main factors that Wall Street economists saw impacting economic growth included inflation, monetary policy, and the tight labour market over the next couple of years.

The vast majority of respondents, 93%, said they believe that the U.S. Federal Reserve Board waited too long to start raising rates to combat inflation.

The survey was unanimous in anticipating a 50-basis-point rate hike later this month. Just over half (54%) saw less than 200 bps in rate hikes this year, with 38% expecting rates to rise by 200 bps.

Rates were expected to peak by the end of 2023 by the majority of respondents (59%), with 24% expecting the peak by the end of this year.

One-third expected inflation to return to the Fed’s 2% target by the first half of 2024, with 27% expecting it earlier (second half of 2023). The median forecast for consumer inflation this year was 6.3%.

Upside risks to the outlook included increased consumer spending, an easing of geopolitical tensions and supply chain recovery, SIFMA noted.

Half of the survey’s respondents expected supply chain disruptions to ease by the second half of this year, with 29% expecting it in the first half of 2023.

The survey’s downside risks included an overcorrection in monetary policy, escalating geopolitical turmoil and higher inflation.

“We are seeing clear signs of improvement, reaching that light at the end of what has been a very long and very painful tunnel,” said Dr. Lindsey Piegza, chief economist and managing director at Stifel Financial Corp. and chair of SIFMA’s Economic Advisory Roundtable. “At the same time, many of last year’s risks still remain, complicating the outlook for the domestic recovery: policy risks, inflation risks, supply distortions, an ongoing labour supply shortage, and more recently international conflict and more aggressive monetary policy, just to name a few.”

“While we have seemingly made it past one crisis, another lurks around the corner as the Fed raises rates, potentially enough to stall consumers and businesses, and choke off domestic economic growth entirely,” Piegza added.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.