Key Points

  • JP Morgan, one of the largest banking institutions in the world, has called off its signal for a possibility of a recession in the US this year.
  • JP Morgan had signaled that the US economy could be in danger of economic contraction due to heightened risk but has now hit a turnaround after the economy showed signs of rebounding.

JP Morgan, one of the most prominent banking institutions in the US and the world, has called off its signal that the US economy could be set for a recession in 2023 after noticing a reduction in pre-exposure risks. However, it still doesn’t believe that all risks are entirely off the table, citing the dangers of the Fed rates policy that has seen 11 hikes so far.

We doubt the economy will slip into a mild contraction in the next quarter- JP Morgan

The US economy has been rocked by high inflation in 2023 and multiple other economic maydays like the banking system collapse and debt ceiling crisis which sent signals of a possible recession. JP Morgan & Chase bank was one of the first financial services providers to signal in 2022 that a recession could be on the horizon for the world’s largest economy.

The weakening of pre-exposing factors to a recession in the United States has sent a wave of hope across international markets that the US economy would be safe from a recession after all. The country’s inflation rate is back at 3% while the labor and jobs sector remains strong. The country’s 11 fed rate hikes are sustainable without too much market constraint.

Additionally, the Banking system collapse has been partially averted, with banks providing over $110 billion in working capital credit funds to keep them afloat. Also, President Biden struck a deal with Congress to lift the US Debt ceiling till 2025 to give a chance to resuscitate the economy and avoid it being plunged into untold economic havoc. 

Michael Feroli, the chief economist at JP Morgan, told their clients that recent metrics indicate that Q3 2023 would see the US economy grow at about 2.5% compared with their previous forecast of 0.5%.

“Given this growth, we doubt the economy will quickly lose enough momentum to slip into a mild contraction as early as next quarter, as we had previously projected,” Feroli wrote.

He also mentioned the aversion to the aforementioned economic crisis as an integral part of giving the US economy another chance at growth and development. He also highlighted productivity gains due in part to the broader implementation of artificial intelligence, which has seen industries grow alongside softened hirings and positive jobs market reports. 

Rates still keep recession possibilities alive.

Rate hikes bring more pain to the market as investors borrow money at a higher cost. As a result, productivity decreases as investors tend to limit their expenditures. In connection with this economic concept, Ferolli said that rates hike in the US currently keep the recession possibility alive.

The country has seen 11 interest rates hike since March 2022, totaling 5.25 percentage points, yet the inflation rate remains above the Central Bank target of 2%. As such, it calls for more rates hike or sustenance of the current policy for extended periods, which means borrowing will remain expensive in the markets. 

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

He, however, expects the Federal Reserve to start cutting rates around Q3 2024, which keeps the possibility of reversed economic growth alive. He also noted that current market pricing strongly points toward a recession. 

A New York Fed indicator shows that the difference between 3-month and 10-year treasury yields indicates a chance of a contraction in the next 12 months. This concept is drawn using the inverted yield curve predictor method, which has been reliable in forecasting recessions since 1959.

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