In a significant shift, Wall Street is dialing out the worst possible economic outcomes for 2013, although it's still forecasting tepid growth.
The January CNBC Fed Survey finds respondents lowering the chance of recession in the next 12 months to 20 percent from 28.5 percent in the December — the first time it's been lowered in seven months.
The survey's 52 respondents also raised their forecast for 2013 year- over-year economic growth to 2.08 percent. It's only a small increase from the December forecast of 1.91 percent, but it's the first time it's been raised since March. The first look at 2014 suggests an improving outlook with GDP growth estimated at 2.56 percent.
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"There is a decent chance that the U.S. economy will get up a head of steam sometime in the second half and above trend growth early in 2014," Bob Baur, Principal Global Investors, wrote in response to the survey. "Headwinds are fading and pent-up demand is surfacing."
Not everyone was as sanguine. The top problem facing the U.S. economy remains "tax/regulatory" issues, chosen by 42 percent of respondents, up from 33 percent in the December survey. The next biggest problem, "slow job growth," is far back with just 20 percent.
Michael Englund from Action Economics insisted that if Congress doesn't solve the nation's fiscal problems soon, disaster could still loom. "The (economic) cycle will end with a sharp dollar drop, inflation, interest rate rise, and deficit surge,'' he warned.
Economists expect this month's revenue increases will take away about 0.6 percent of growth this year, but Joel Naroff of Naroff Economic Advisors says there's an offset from the removal of uncertainties: hiring and business investment. "Faster job growth and rebounding capital expenditures could overcome the slowdown that the tax increases and likely spending cuts present,'' Naroff said.
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Market participants also appear to be taking the possibility of a debt ceiling breach off the table, with 86 percent saying they believe Congress will raise the borrowing limit whenever it is hit this year.
Europe remains an important source of worry with 62 percent saying they believe the relative calm on the continent is temporary and only 30 percent saying it's permanent. John Lonski of Moody's wrote, "Possible policy mistakes in the U.S. and Europe are the biggest risk to the adequacy of economic growth in 2013."
Still, there's little doubt the outlook for Europe has improved. Just 10 percent say the European financial crisis is the biggest threat to the U.S. economy, compared with 37 percent in April.