The chance of recession in the next 12 months jumped to a two-year high in the latest CNBC Fed Survey as Wall Street continues to downgrade the outlook for U.S. growth and push out the date for the first Fed rate hike.
Respondents to the survey, including economists, fund managers and analysts, see a 22 percent chance of a recession in the next year, up from 19 percent last month and the highest level since the fiscal cliff debate seized Washington and the nation in January 2013. The chance of recession, however, remains well below its all-time high of 36 percent in 2011, but higher than the 13 percent all-time low at the beginning of this year.
"The economy is losing momentum in a way that in the past has been consistent with the Fed cutting interest rates, certainly not raising them," Mark Vitner, a senior economist at Wells Fargo, wrote in response to the survey.
The median of the 41 respondents sees the first rate in December, compared with September in the prior survey. While about half of the respondents forecast the first rate hike this year, the other half sees it into 2016 and even, for some, as late as 2017. As recently as the September survey, 80 percent were certain of a 2015 hike.
"The earliest possible liftoff date for the FOMC is now January," wrote John Donaldson, vice president of Haverford Trust. "That would likely require a good to very good holiday season for consumer spending combined with a winter without a polar vortex."
Not everyone is so sure. Many expressed concerned about the dangers of the Fed waiting too long to raise rates. Nearly half worry that not hiking rates will give the central bank less defense against a future downturn. A third are concerned about the risk to the credibility of the Fed, which has forecast a rate rise this year for some time.
"There is an increasing risk that the Federal Reserve will be too slow in beginning to normalize interest rates and will need to raise rates much more aggressively in the future," said Mark Zandi, chief economist of Moody's Analytics.
The overwhelming economic concern among respondents is weak overseas growth, chosen by 41 percent as the biggest threat to the U.S. economy. The next biggest threat, chosen by 13 percent, is geopolitical risks. Slow wage growth is the main concern with the domestic economy, but it only ranked in third place, a sign that many believe the underlying domestic economy is at least stable.
Still, the outlook for U.S. growth continues to creep lower, with average growth for 2016 being lowered for the fifth straight survey. Growth next year, which had been estimated as high as 2.9 percent, is now seen at 2.6 percent. Growth in 2015, once estimated to be at 3 percent, is now seen at just 2.3 percent. And the outlook for inflation in the U.S. continues to fall. Respondents believed for most of this year that the consumer price index would hit 2 percent. Now, the outlook is for just 1.75 percent.
"In an environment with weak oil prices and falling commodity prices how could so many members be 'reasonably' sure that inflation would get back to 2 percent over the 'intermediate term' by end-2015?" asked Robert Brusca, chief economist of Fact and Opinion Economics
The outlook for the S&P brightened just a bit or, at least, the forecast didn't fall for the first time since the summer. The average respondent sees the at 2,079 by year-end, up 8 points from Monday's close, and at 2,166 for the end of 2016, or about a 4.5 percent gain.
Only a third of respondents judge that stocks are already discounting a rate rise, suggesting some downside risk for equities if the Fed were to hike this year. The outlook for the 10-year yield continues to decline, with rates seen hitting just 2.7 percent at the end of 2016, down from 2.9 percent in the prior survey.
The survey was conducted from Oct. 22 through Oct. 25.