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MNI INTERVIEW: US Recession To Be Shallow, Can Be Avoided -S&P

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The U.S. economy will get through the Fed’s monetary tightening campaign with only a shallow recession, and there is a chance a downturn might even be avoided given a strong labor market and better growth in Europe, S&P Global Ratings chief economist Beth Ann Bovino told MNI.

“We still have a shallow recession in our forecast, although it looks like it could be shallower than what we had earlier thought and it was a pretty shallow recession to begin with,” she said in an interview. “There is the chance, the upside would be that there could be a very low growth environment for this year, still painful, but nowhere near the last two recessions the United States went through.”

U.S. recession worries have receded as the job market continues to show unexpected strength because of the unusually tight conditions of post-Covid employment. Federal Reserve officials’ hopes for a soft landing have hinged in part on the idea that Fed tightening could reduce the number of job openings without delivering a major hit to employment. (See MNI INTERVIEW: Strong Job Matching Aids Soft Landing Case-Fed Economist)

The latest employment figures showed a spike of more than half a million new jobs in January, while the jobless rate fell to a new 50-year low of 3.4%.


“Markets might want to reconsider their expectation that the Fed is going to cut rates at the end of this year,” Bovino said. “The jobs report indicates the Fed might want to keep rates higher for longer.”

Markets have so far ignored Fed messaging that no rate cuts are forthcoming this year, but Bovino said that doesn’t square with analysts' increasingly upbeat view of the economy.

“Markets are hoping to have their cake and eat it too. Markets are assuming a soft landing as well as assuming the Fed is going to cut earlier,” she said. “But the Fed is not that convinced and based on this incredibly strong jobs report there is a concern that the Fed might be right and they’re going to have rates higher for longer than markets expect.”

In addition, a warmer-than-expected winter and falling energy prices have boosted Europe’s ability to cope with the fuel-cost hit from the war in Ukraine, in turn bolstering U.S. economic prospects.

“Europe has managed, seemingly with really bad odds, to see rather nice growth readings for 2022 – that’s another reason why people are more optimistic,” Bovino said.


Bovino said the U.S. debt ceiling debacle presents a headwind to confidence, but she expects the impasse to be resolved in time for the country to avoid a potentially catastrophic default on its debt

“History has shown that they have come to their senses, usually at the midnight hour,” said Bovino, noting the Congress has raised the debt ceiling on more than 80 previous occasions. S&P stripped the United States of its AAA credit rating after the 2011 debt ceiling crisis.

“If the government does default, doesn’t raise the debt ceiling, the impact on both the United States and global economies as well as global markets would be catastrophic, far worse than the world experienced after the Lehman crisis,” she said.

MNI Washington Bureau | +1 202 371 2121 |
MNI Washington Bureau | +1 202 371 2121 |

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