Among the noneconomists I’ve recently interacted with, there is a lot of confusion and uncertainty about how the economy’s doing and where it is heading. Among economists, it’s pretty much the same. Some of them are predicting a recession starting later this year. Others are predicting a soft landing or a “slowcession,” when economic growth “comes to a near standstill but never slips into reverse,” as Scott Hoyt, a senior director at Moody’s Analytics, describes it.
The world economy is still emerging from an unprecedented pandemic, Europe is experiencing its biggest war since 1945, and many countries have been recording inflation rates not seen in thirty years, so it’s hardly surprising that the economic picture is blurred. Since the coronavirus started to spread, in 2020, some long-standing economic relationships have broken down. Other, new trends have emerged, and they could turn out to be temporary. But, in looking through this haze of conflicting data, two things stand out.
The first is that, while higher inflation has raised the cost of living significantly in the past couple of years, the U.S. economy has made an impressive recovery from the pandemic in terms of output and jobs. On Thursday, the Department of Commerce reported that inflation-adjusted G.D.P. rose at an annualized rate of 2.9 per cent in the third quarter of last year. In 2022 as a whole, growth came in at 2.1 per cent, down from a bumper 5.9 per cent in 2021, but still well above the average growth rate from 2001 to 2020, which was about 1.7 per cent. If one considers G.D.P. levels rather than growth rates, the economy is now almost back on the trend line that it was on before the pandemic. And the unemployment rate, at 3.5 per cent, is back to its pre-pandemic February, 2020 level, which was the lowest level in half a century. These outcomes are much better than many economists and policymakers had expected during 2020. In fact, as the Washington Post’s Heather Long pointed out, to “recover all jobs and output in basically 2 years is remarkable.”
It’s easy to forget now that, between April and June of 2020, the unemployment rate surged into the double digits. At that point, it seemed possible that a vicious cycle would kick in—rising joblessness would lead to falling incomes over all, falling incomes would result in less spending, which in turn would lead to more job losses (as the demand for goods and services went down). That this didn’t happen is testament partly to the rapid reopening of parts of the economy after the initial shutdowns and to three big stimulus packages that Congress passed in 2020 and 2021, which together provided roughly four trillion dollars in financial support for households, businesses, and local governments.
To be sure, there is still a heated discussion about how much these measures, particularly the American Rescue Plan Act, which a Democratic Congress passed in March, 2021, may have contributed to the surge in inflation that the economy experienced in 2021 and 2022, as opposed to snarls in global supply chains and other challenges prompted by the pandemic. However, there can be no doubt that the stimulus policies succeeded in preventing a long-term slump in output and employment, which would have piled more human hardship on top of the public-health crisis, and would likely also have brought on a financial crisis, as unemployed workers and stricken businesses defaulted on their debts. Even if the stimulus policies did contribute to an inflation spike that increasingly appears to be a temporary one—and my assessment is that other factors played a much bigger role—it was a price worth paying to avoid a much larger calamity.
The second point that stands out is that, despite higher-than-expected G.D.P. growth at the end of last year, many signs now hint that the economy is slowing sharply, and that if the Federal Reserve sticks to its policy of raising interest rates it will likely bring about the recession it wants to avoid. Beyond the headline figure of 2.9 per cent, the G.D.P. report contained some worrying signs. Companies building up inventories that they haven’t sold yet accounted for about half of the fourth-quarter G.D.P. growth, and foreign trade for another fifth. Final domestic sales—the stuff and services that Americans actually bought—expanded by just 0.8 per cent on an annualized basis.
Another thing to note: the G.D.P. report is backward-looking. It doesn’t necessarily point to where things are heading. On Friday, a separate Commerce Department report said that in December consumer spending fell a bit compared to the previous month, a sign that economic growth was weakening toward the end of the fourth quarter. Earlier this week, the Conference Board released its latest index of leading indicators, which, in contrast to the G.D.P. report, includes forward-looking reports, such as the amount of new orders from businesses; findings from consumer-confidence surveys; the numbers of building permits issued; and interest-rate spreads. The index “fell sharply again in December—continuing to signal recession for the US economy in the near term,” Ataman Ozyildirim, the senior director of economics at the Conference Board, noted in a statement accompanying the release. “Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023.”
Now, the Conference Board’s index isn’t infallible, and one thing we’ve learned repeatedly in this pandemic economy is that economic forecasts should be treated skeptically. Given the big fall in energy prices since last summer and the lingering supportive effects of the stimulus packages, as well as some new spending from last year’s bipartisan infrastructure bill and Inflation Reduction Act, it’s still possible that this year’s economy could turn out to be stronger than the pessimists predict. But we can’t rely on that happening, and it’s time for Jerome Powell and his colleagues to help things along.
Since the beginning of 2022, the central bank has focussed almost exclusively on bringing inflation down. It’s already winning that war: the Commerce Department report released on Friday also showed that a measure of inflation the Fed watches closely fell to five per cent last month, from 5.5 per cent in November, and 6.3 per cent in August. With inflation steadily coming down, the Fed now has the flexibility to pay more attention to its other policy mandate, which is to maximize employment. At its first policy meeting of the year, which will take place next week, it should do just that. ♦
