Recessions are notoriously difficult to predict. At the end of 2019, for example, many pundits were forecasting a recession simply because the boom had gone on for so long. But economic booms don’t die of old age, they get murdered by an unexpected event — like a pandemic. So those 2019 forecasts were right but for the wrong reason.
Will there be a recession this year? My only prediction is this: No one will get it right for the right reasons. That’s because the answer depends on the unknown. Will global conflict escalate? Will there be another pandemic? Will oil prices skyrocket? Will a natural disaster clog up supply chains or wipe out valuable capital?
As usual, all eyes are on the US Federal Reserve and what will happen with monetary policy. The Fed provides both a promise and a risk: It has the tools to steer the economy on the right path, but to do so it has to make good guesses about the future.
Consider what people expected a year ago. As my fellow Bloomberg Opinion columnist Tyler Cowen has pointed out, in 2022 forecasts of a recession in 2023 were widespread. The vast majority of economists predicted that there would be high unemployment or high inflation right now.
And yet here we are: Core PCE inflation over the past six months has averaged 1.9% at an annualized rate. That is below the Fed’s target of 2%. And the unemployment rate is 3.7%.
An improbable mission, accomplished. Americans should all raise a glass to their monetary policymakers, most notably Fed Chair Jerome Powell, who managed to minimize the pain of the pandemic recession and bring inflation quickly under control, all without slowing down the economy.
How did they accomplish this immaculate disinflation? Those of us who argued that there could be a soft landing have been proved right, but humility requires acknowledging that at least part of the disinflation is simply due to good luck.
Some of that reflects the accuracy of the Fed’s 2021 view that some of the inflation was transitory. Patience was needed over the past few years — and the Fed was just the right amount of patient, despite pressure on it to raise rates faster and higher than it ultimately needed to.
The challenge was that the transitory period of demand outstripping supply lasted longer than many expected, and it was driven by a shock to both demand and supply. Part of the reason the transitory period lasted so long was that consumer preferences shifted during the pandemic, away from services and toward stuff. (In fact, some of that shift persists even today.) Inflation in goods was running at double-digit rates into early 2022, prompting fears that the rate of price increases would not abate naturally. But both demand and supply normalized in late 2022 and throughout 2023, doing much of the work of bringing down inflation.
Supply improvements are the primary reason the US economy could continue to expand at a rapid clip in 2023 — much faster than most economists think is sustainable — without sparking further inflation. Not only are supply chains getting back to normal, but there are also record levels of new business formation and a rapid expansion in the labor supply.
Some of the credit for this has to go to policy makers. Despite high interest rates, manufacturing investment soared to a historic high, at least partly in response to legislation that encouraged such investment. Typically expansionary fiscal policy at a time of tight supply will fuel inflation, and many economists were fearful that these policies would do just that. But this time was different.
Over the next few decades scholars will study the last several years to learn how the US, in contrast to most other countries, managed to weather the storm of inflation so well. How did the US have higher than expected economic growth, lower than predicted unemployment, and yet bring inflation down to 2%?
Eventually, economists and researchers will reach some answers. Still, my bet is that we had just the right mix of luck and skill. The US may have a recession in 2024, or it may not. What’s clear right now, however, as we start the new year, is that Americans have reason to celebrate.
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