[Bloomberg Column] The 2024 Economy Is as Difficult to Predict as 2023

Global Economists' 2023 US Recession Forecast Misses Mark
Fed Quickly Controls Inflation... Unemployment at Full Employment Level
Toast to Powell... Will Become a Case Study in Monetary Policy

Predicting a recession is very difficult. For example, at the end of 2019, many experts anticipated a recession simply because the economic boom had lasted too long. However, the economic boom at that time did not end because it was prolonged, but rather disappeared due to an unexpected event like the pandemic (global outbreak). Therefore, the recession prediction in 2019 was correct, but the reason was wrong.

Will a recession occur this year? My only prediction is this: no one can accurately predict it for the right reasons. The answer depends on the unknown. Will global conflicts escalate? Will another pandemic occur? Will oil prices soar? Will natural disasters cause supply chain bottlenecks or will expensive capital disappear?

As always, all eyes are on the U.S. Federal Reserve (Fed) and what monetary policy will do. The Fed presents both possibilities and risks. The Fed has the tools to guide the economy on the right path, but to do so, it must make good predictions about the future.

Think about what people predicted a year ago. My colleague and Bloomberg columnist Tyler Cowen predicted in 2022 that a recession would be widespread in 2023. Most economists expected high unemployment and high inflation immediately.

But the situation we face now is this: the core Personal Consumption Expenditures (PCE) inflation rate averaged 1.9% annualized over the past six months. It is below the Fed’s target of 2%. The unemployment rate is 3.7% (an unemployment rate in the 3% range is nearly full employment).

A difficult task has been accomplished. Americans should raise a toast to monetary policymakers, especially Fed Chair Jerome Powell. They minimized the pain of the pandemic-induced recession and quickly controlled inflation without causing an economic slowdown.

How were they able to slow inflation so perfectly? It has been proven that those who said a soft landing was possible were right. But humility is also needed to acknowledge that some of the inflation slowdown was at least partly due to simple luck.

This partly reflects the Fed’s 2021 view that some inflation was temporary. Over the past few years, the Fed has needed patience. Despite pressure to raise interest rates faster and higher than ultimately necessary, the Fed maintained appropriate patience.

The problem was that the temporary period during which demand exceeded supply lasted longer than many expected, and this phenomenon was driven by shocks on both the demand and supply sides. One reason the temporary (supply-demand mismatch) period lasted so long was that during the pandemic, consumer preferences shifted from services to goods. The goods price inflation rate reached double digits in early 2022. This raised concerns that inflation would not naturally fall. However, demand and supply normalized over late 2022 and 2023, playing a major role in reducing inflation.

Supply (issues) improvements were a key reason the U.S. economy was able to sustain rapid growth in 2023 without causing further inflation increases. The growth rate was much faster than most economists considered sustainable. Not only supply chain normalization but also record levels of new business creation and rapid expansion of the labor supply are occurring.

Some of the credit for this must go to policymakers. Despite high interest rates, manufacturing investment soared to record highs. This was at least partly due to legislation encouraging such investment. Generally, expansionary fiscal policy during times of supply shortages stimulates inflation. Many economists feared such policies would do just that. But this time, it was different.

For decades to come, scholars will study how the U.S. managed the inflation storm so well compared to most other countries in recent years. How did the U.S. achieve higher-than-expected economic growth and lower-than-expected unemployment while keeping inflation at 2%?

In the end, economists and researchers will arrive at several answers. I still believe it was due to a fortunate and appropriate combination of luck and technology. The U.S. may or may not face a recession in 2024. But as we start the new year, one thing is clear: Americans have reason to celebrate.

Betsy Stevenson, Professor of Public Policy and Economics, University of Michigan

This article is a translation by Asia Economy of Bloomberg’s column '2024's Economy Will Be Just as Unpredictable as 2023's.'