Despite Surprise Growth in US Economy... No "Soft Landing" Amid Second Half Downturn

US Q1 Growth Rate 2%
Stronger Than Expected, But Recession Unavoidable
"71% Chance of Entering Recession Within a Year"

The U.S. economy showed a surprising growth rate in the first quarter of this year, exceeding market expectations. Fueled by strong consumption and employment indicators, there is growing optimism that the U.S. economy can maintain high growth without declining in the second half of the year. However, some analysts caution that it is still too early to be optimistic, as factors that could cause a sharp economic downturn remain.

On the 29th (local time), The Wall Street Journal (WSJ) reported, "The U.S. economy found remarkable vitality in the first half of the year, but the outlook for a recession in the second half remains." While the U.S. economy's first-quarter growth rate surpassed expectations, reviving the 'No landing' scenario, WSJ analyzed that optimism is still premature. WSJ observed, "The anticipated recession initially expected early this year may be delayed somewhat compared to previous forecasts, but a recession remains unavoidable."

Experts also lean toward the view that a recession will occur in the second half of this year or early next year. The key variable for the economic direction is the timing and intensity of additional interest rate hikes. Darrell Cronk, head of Wells Fargo Investment Institute, said, "Out of nine past interest rate hikes by the U.S. Federal Reserve (Fed), seven were followed by recessions," and predicted, "A recession will hit in the second half of this year or the first half of next year." He added, "Thanks to the strong employment market in the first quarter, a recession was avoided, but the pressure to raise the benchmark interest rate remains, so the outlook is not bright."

Fed Chair Jerome Powell, speaking in Madrid, Spain, reaffirmed the Fed's stance that two additional benchmark interest rate hikes are necessary within the year to curb inflation, stating, "It will take considerable time to ease inflation." At the Federal Open Market Committee (FOMC) meeting on the 14th, the Fed held rates steady but raised the year-end rate forecast on the dot plot from 5.1% to 5.6%. This suggests the possibility of two baby steps (0.25 percentage point rate hikes) in the remaining four meetings this year.

UBS stated in a report, "With robust economic growth in the first quarter, market participants have begun to see the possibility of a soft landing, but the risk of a sharp economic downturn remains due to high inflation and strong employment indicators." The Federal Reserve Bank of New York estimated the probability of the U.S. economy entering a recession within one year at 71%.

[Image source=Reuters Yonhap News]

The contraction of credit, leading to reduced corporate investment, was also identified as a hidden risk. Luke Tilley, chief economist at Wilmington Trust, said, "Companies are struggling with higher financing costs and credit tightening," and predicted, "Due to the decline in new investments and job cuts, the economy is expected to enter a mild recession in the second half of this year."

On the same day, the U.S. Department of Commerce announced that the final GDP growth rate for the first quarter was 2.0% annualized. This significantly exceeded market expectations (1.4%) and was revised upward by 0.7 to 0.9 percentage points from the previously released preliminary figure (1.3%) and the advance estimate (1.1%). The Department of Commerce cited strong personal consumption as the driving force behind the surprising growth. Personal consumption expenditures, which account for about 70% of GDP, increased by 4.2%, marking the strongest growth in two years since mid-2021, and exports also contributed positively.

S&P Global Market Intelligence projected a 1.7% GDP growth rate for the second quarter, a significant upward revision from the 0.8% forecast released earlier this month, indicating expectations for continued economic growth exceeding market forecasts.

Nancy Vanden Houten, chief U.S. economist at Oxford Economics, said, "U.S. economic growth is quite robust and momentum remains, but the outlook for a recession remains as the forces driving growth weaken. However, the timing of the recession is expected to be later than our previous forecast."

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