Morgan Stanley economists are clinging to their forecast of a 20 percent chance the US economy will slip into recession in 2016 on evidence of contraction in the factory sector and signs of slowing among services industries. "That assessment still feels about right," they said in a research note released on Friday. They forecast gross domestic product was little changed in the fourth quarter and would likely grow 1.8 percent in 2016.
Among economists polled by Reuters, the median forecast is for US GDP growth of 0.80 percent at an annualised rate in the fourth quarter and annual growth of 2.5 percent in 2016. The government will release its first reading on fourth-quarter economic growth on January 29. If GDP growth deteriorates to a range of 1 percent to 1.5 percent in 2016, the Federal Reserve would likely refrain from raising interest rates this year, the Morgan Stanley economists said.
The US central bank raised rates in December, the first hike in nearly a decade. Fed policymakers also released their economic and interest rate forecasts, which suggested on average they see four quarter-point rate increases in 2016. "Stall speed in the US, or even a shift to a lower channel of growth, would likely halt the Fed in its tracks - precipitating a 'one-and-done' scenario for this policy tightening cycle," the Morgan Stanley economists said.
In a separate report, they said the recent stock market rout and a deterioration in inflation expectations to record lows, as signalled in the Treasury Inflation Protected Securities since the end of 2015, implied the Fed might not raise rates at all this year. "Wrapping all of this together, there has been a substantial tightening of financial conditions since December - by our estimation the economic equivalent of four rate hikes. The Fed raises rates to tighten financial conditions, it loathes to move when the market has already done its tightening for it," the Morgan Stanley economists wrote.