New York Fed Model Sees Economy Shrinking This Year and Next

(Original Caption) New York, N.Y.: Gold bars are weighed on a giant scale in the gold vault of the Federal Reserve Bank, where $15 billion worth of gold is kept
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The U.S. economy is very likely to shrink this year and next, an economic model used by the Federal Reserve Bank of New York indicates.

The model predicts the economy will shrink 0.6 percent this year and 0.5 percent next. This is considerably more pessimistic than the outlook in March, when the model predicted the economy would grow 0.9 percent this year and 1.2 percent in 2023.

“According to the model, the probability of a soft landing — defined as four-quarter GDP growth staying positive over the next ten quarters — is only about 10%,” the economists who manage the model wrote in a blog post on the bank’s Liberty Street Economics website. “Conversely, the chances of a hard landing — defined to include at least one quarter in the next ten in which four-quarter GDP growth dips below -1%, as occurred during the 1990 recession — are about 80%.”

The economists said the model’s results turned grimmer due to the “continuation of the cost-push shocks that have hit the economy since early 2021, resulting in a higher projection for inflation and a somewhat lower projection for output growth.”

As well, the economists now expect tighter monetary policy in 2022 and 2023, with a much steeper climb in interest rates. Last week, the Federal Open Market Committee—the Fed’s monetary policy unit—raised its target rate by 75 basis points to a range of 1.50 percent to 1.75 percent. This is the first time since November 1994 that the Fed has raised its target by three-quarters of a percentage point at a single meeting.

A survey of economists conducted by the Initiative on Global Markets at the University of Chicago’s Booth School of Business in partnership with the Financial Times recently indicated that 40 percent of respondents project that the National Bureau of Economic Research — the nonprofit group that is the official arbiter of when recessions begin and end — will declare a recession in the first half of next year. One third believe a recession will be declared in the second half of next year.

The Atlanta Fed’s GDPNOW estimate of growth fell to zero last week, indicating that recent economic data points to an economy that is not growing.

The New York Fed economists point out that the model’s results are not an official New York Fed forecast, but only “an input to the Research staff’s overall forecasting process.”

 

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