In 2021, a bunch of economists and policy makers underestimated the inflation that was taking root around the world. In 2022, as inflation hit 40-year-highs and the Fed ramped up interest rates, many of those commentators went full-on gloomy — predicting a recession was all but inevitable.
But in the (slightly) brighter light of 2023, it looks as if the optimists — those who called inflation "transitory" and believed the Fed could pull off a so-called soft landing — may have been right all along.
See here: Friday's jobs report was a barn burner. Economists had forecast about 185,000 positions added in January, and instead it added 517,000.
The unemployment rate, which was expected to tick up slightly, instead fell to 3.4% from 3.5%. It hasn't been that low since before the moon landing.
The labor market is just not giving up. And that makes it hard, if not impossible, to imagine a recession anytime soon. Take it from the experts:
- "You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in 50 years," Treasury Secretary Janet Yellen said Monday on "Good Morning America."
- "Any concern the economy is in recession or close to a recession should be completely dashed by these numbers," Moody's Analytics chief economist Mark Zandi told CNN on Friday.
- "The economy is further away from recession than ever," wrote Christopher Rupkey, chief economist at Fwdbonds. "This is one of the days where economists don't pick up the phone because they simply do not know what to say."
To recap: Inflation is trending down. The labor market is stronger than its been in more than half a century. And economic growth is still positive, albeit slightly less robust in the fourth quarter.
So, what happened?
For one, the pandemic broke a lot of the models that economists have historically relied on to make their forecasts. It's a hard job in normal times, and the past three years have been far from normal.
But our collective fixation on the recession (and yes, I include myself in this critique) may point to something darker happening in our pandemic-scarred national psyche.
After three years in a sort of Twilight Zone daze of sickness, death, fear, isolation, all-around upheaval of work and social order, have we convinced ourselves that the worst-case scenario is always more likely?
Economist Justin Wolfers (who, for the record, was among the handful of prominent commentators to stand by the idea that the US was nowhere near a recession) gets at that idea in a tweet thread from Friday:
"Last year involved the biggest mis-reading of the economy in my lifetime ... My meta-theory of why so many people have been wrong about the economy for so long is that many economists (and econ journos) are incapable of acknowledging that sometimes good things happen," Wolfers wrote.
As one of those "econ journos," I'll own that. But I think having gloomy as your default setting is just a natural reaction to being alive in the 2020s.
Because I just can't help myself, I'll end with a caveat: Although the economy is in much better shape than expected, we're not out of the woods. Higher interest rates make it harder for people to borrow money, which is bad news for anyone hoping to finance a home, take out student loans or start a business. And consumer spending, the biggest engine of the US economy, is beginning to flag.
"A rolling recession — where various sectors of the economy take turns contracting rather than simultaneously — is in progress," wrote Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist of SS Economics, in a note Friday.
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