U.S. Recession Probability Downgraded to 13.3%: Why Experts See Growth Up and Employment Down

The Philadelphia Federal Reserve's survey of professional forecasters released on August 14 shows that 32 respondents are more optimistic about recent growth in the U.S. The median forecast indicates that real GDP will grow at an annualized rate of 2.5% in the third quarter, up from the previous prediction of 2.2% three months ago; the fourth quarter forecast has been raised from 1.6% to 2.3%. The average probability of negative growth in the third quarter has been significantly downgraded from 25.1% to 13.3%.

However, signals from the labor market have not strengthened in tandem. Forecasters have lowered the median unemployment rate for the third quarter from 4.5% to 4.2%, but have reduced the forecast for monthly non-farm job additions from 61,200 to 45,600. This seemingly contradictory result can coexist: the unemployment rate is influenced by labor force participation rates and demographic factors, while job additions measure how many positions companies are adding each month; the economy can continue to grow while requiring fewer new jobs.

Inflation expectations have also shown near-term improvement. Forecasters have lowered the annualized overall CPI forecast for the third quarter from 3.0% to 2.3%, and the core CPI from 2.9% to 2.7%; the forecasts for overall PCE and core PCE for the quarter have also been reduced to 2.3% and 2.7%, respectively. However, when measured from the fourth quarter to the fourth quarter, the overall CPI forecast for 2026 remains at 3.6%, close to the last survey, indicating that the cooling in the quarter has not been directly extrapolated to mean that the inflation problem for the year has disappeared.

This survey is not the official forecast of the Philadelphia Federal Reserve, nor is it a commitment to monetary policy. It aggregates the judgments of professional forecasters at a specific point in time, and actual data, new shocks, and statistical revisions can change the results. The 13.3% figure represents the average probability assigned by respondents to negative growth in the quarter, and does not imply that a recession has been ruled out, nor does it mean that the probability of a recession in the coming year is only 13.3%.

The upward revision in growth alongside the downward revision in job additions indicates that the relationship between productivity and employment is changing.

Traditionally, faster economic growth is usually accompanied by companies expanding hiring. However, the two are not fixed in proportion. Companies can increase output without significantly increasing jobs by raising existing employees' hours, automating, investing in software, or utilizing capacity. If productivity improves, GDP growth may exceed employment growth; if companies remain uncertain about the future, they may choose to increase output first and delay hiring.

The reduction in job addition forecasts is also influenced by base effects. The labor market is large, and the number of new jobs needed to maintain a stable unemployment rate will vary with population and participation rates. The forecast of 45,600 is lower than during previous periods of rapid expansion, but does not necessarily mean that total employment is contracting. To assess whether the situation is worsening, one needs to observe unemployment claims, job vacancies, hours worked, wages, and participation rates across different age groups simultaneously.

The survey has lowered the unemployment rate forecast range from this quarter to the second quarter of 2027 to 4.2% to 4.3%, which is more optimistic than the previous path of maintaining 4.5%. This indicates that forecasters believe that fewer new jobs are still sufficient to avoid a significant rise in unemployment. However, if participation rates unexpectedly increase, or if layoffs occur in concentration, the unemployment rate may rise faster than predicted.

For businesses, this is an environment of "growth is acceptable, hiring is cautious." Income and output may not necessarily be weak, but management will place greater emphasis on unit labor costs and investment returns. For households, macro GDP growth of over 2% does not guarantee ease of job seeking, especially for those newly entering the labor market or needing to switch industries, who may feel the situation is significantly weaker than the aggregate data suggests.

The near-term cooling of inflation does not eliminate pressure for the entire year, and the Federal Reserve still needs to look at real data.

The overall CPI annualized forecast for the third quarter has dropped to 2.3%, which is a favorable signal, indicating that forecasters believe recent price increases may slow down. The core CPI remains at 2.7%, suggesting that pressure excluding food and energy is more stubborn. Quarterly annualized data can also be easily influenced by fluctuations in certain months and should not be mixed with year-on-year comparisons or fourth-quarter to fourth-quarter measures.

The overall CPI forecast for the fourth quarter of 2026 is still expected to be 3.6%, reflecting price increases that have occurred during the year and subsequent uncertainties. Even if the next few months see moderate month-on-month changes, the year-end figure may still exceed policy targets. Long-term expectations remain relatively stable: the average forecast for overall CPI from 2026 to 2035 is 2.30%, and for PCE it is 2.20%, indicating that respondents do not view short-term pressures as permanently out of control.

For the Federal Reserve, this set of survey results reduces the urgency to quickly rescue growth, but does not provide a single signal for easy rate cuts. The upward revision in growth and downward revision in unemployment rates support patience; the slowdown in job additions and the decline in near-term inflation support gradual easing. Ultimately, policy will still depend on actual inflation, wage, and employment data, rather than the median of forecasters.

The core of this survey is not that the U.S. economy has already achieved a "soft landing," but rather that the most pessimistic near-term scenarios have receded. The probability of negative growth in the third quarter has dropped from 25.1% to 13.3%, representing an improvement in risk assessment; the monthly job addition forecast has fallen to 45,600, which reminds us that the quality of growth is changing. If the market chooses only one side of the upward revision in growth or the downward revision in employment, it will miss the real signal: the economy may continue to expand, but the expansion may not necessarily revert to broad and rapid job creation.

Forecasts will be updated with new data, and what is truly worth tracking is whether the direction can be maintained over several consecutive quarters, rather than a short-term market reaction from a single survey.