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How the Recession Doomers Got the U.S. Economy So Wrong

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This is Work in Progress, a newsletter by Derek Thompson about work, technology, and how to solve some of America’s biggest problems. Sign up here to get it every week.

In 2022, it was a matter of conventional and nearly universal wisdom that the 2023 economy would be a nightmare.

Last October, a Bloomberg economic model said that the odds of a U.S. recession this year were 100 percent. No, not 99.99 percent, as in the odds that you’ll avoid being struck by lighting this evening. One hundred percent, as in the odds that you’ll avoid falling into a time-bending wormhole that spits you out in 17th-century Versailles at a dinner table with Louis XIV.

Bloomberg’s bot wasn’t unique in its gloom, either. The Federal Reserve itself projected hundreds of thousands of job losses by this December. In a survey by the Philadelphia Fed that has been conducted since the late 1960s, the number of economists anticipating an imminent recession hit an all-time high last year, meaning the level of expert pessimism was greater than before the stagflation crisis of the 1970s, the brutal recession of the early 1980s, and the Great Recession of 2008. Economic glumness spread to the C-suite. Last year, a KPMG poll found that nine in 10 chief executives anticipated a recession in 2023. Republicans eagerly piled on, proactively blaming the White House for a “Cruel Biden Recession” that all the experts seemingly claimed was inevitable.

And how’d those experts do? So far, terribly. We’re now in the back half of a year that was supposedly doomed, and the U.S. economy isn’t just narrowly avoiding a downturn. As the writer Noah Smith points out, nearly everything you should want to go well in an economy is going quite well right now.

Employment is high, inflation is falling, real incomes are rising, and inequality is narrowing. Superlatives abound. The official unemployment rate is near a 60-year low, and the jobless rate for Black Americans recently hit an all-time low. The U.S. has the fastest growth rate and the lowest annual inflation of any G7 country. Yes, problems exist. Essentials such as housing, education, and health care are still too expensive; wages could be growing faster; and last year’s inflation is still baked into today’s prices. But mostly, things are good—for now.

In fairness, economists had some fine reasons to expect a rough 2023. When inflation surged to multi-decade highs, the Federal Reserve raised interest rates. As economists, including Larry Summers, pointed out, deploying high rates to combat high inflation has historically been a simple recipe for a recession. The logic is straightforward. Higher interest rates increase the cost of capital, which reduces investment, which blunts hiring, which reduces wage growth, which depresses spending, and ta-da, you’ve produced an economic downturn that cools prices.

But that’s not how 2023 has gone at all. Instead, we seem very close to something like “immaculate disinflation”—an unusual case of falling inflation without rising unemployment. So what, exactly, might experts have gotten so wrong? How did we beat a serious case of inflation without, to date, triggering a downturn?

The first explanation is that economic prediction has always been more sorcery than science. Since the Philly Fed survey started in 1968, the majority of economists have failed to anticipate every single recession. Less than a third of economists foresaw the 1990 and 2001 downturns, and they whiffed on the 2008 crash. Economic models of the future are perhaps best understood as astrology faintly decorated with calculus equations.

The second explanation is that the U.S. economy bravely withstood a number of shocks—and then the shocks went away. J.P. Morgan’s Michael Cembalest wrote that the economy’s resilience reminds him of Rasputin, the Russian mystic who survived poisoning, several beatings, and a few shootings. Similarly, the U.S. economy has endured a gauntlet of pain: a wild surge in post-pandemic spending on stuff like cars and electronics, and then broken supply chains that couldn’t handle all this new demand, a historic increase in resignations as the service sector came back online, a spike in energy prices after the initial invasion of Ukraine, a run on real estate that depleted inventory, and don’t forget the slowdown in China and, of course, rocketing interest rates. That’s a lot! The shocks came from all over: high demand, low supply, geopolitics, international shipping, Vladimir Putin’s imperial mania. But eventually, the pain subsided, and the Rasputin-esque U.S. economy is alive today because the tortuous inflation surprises have mostly dissipated.

This explanation leaves out the Federal Reserve entirely. And perhaps that’s telling. One cheeky lesson of the past 15 years might be that monetary policy is weaker than most experts thought at both stimulating and depressing growth. During the 2010s, the Obama administration (constrained by Republican intransigence) leaned on the Fed and low interest rates to lift the moribund economy, but economic growth was rather putrid anyway. If the Fed wasn’t strong enough then to stimulate an economy suffering from depressed demand, and isn’t strong enough now to depress an economy overstimulated by high inflation, maybe we need a new theory of just how important interest rates are to overall economic health.

But as the writer Matt Yglesias points out, another interpretation of the past two years gives the Fed a bit more credit. The central bank is not just a mute wizard with a joystick that raises and lowers interest rates. Central bankers talk. Their talking shapes expectations, moods, vibes. The chair of the Federal Reserve is the chief vibemeister of the U.S. economy, and conceivably the combination of his statements and his actions has maneuvered the U.S. economy into the Goldilocks zone by making Americans just anxious enough to throttle consumer spending and wage growth while other economic disruptions went away.

I like this idea. For the past few months, I’ve been puzzling over a related mystery, which is why ordinary Americans are so convinced that the economy is terrible. In April, just as unemployment hit a 60-year low, a record-high share of the public expressed negative views of the economy. Now, Jeff Bezos famously said that “when the anecdotes and the data disagree, the anecdotes are usually right.” But Americans’ feelings have been factually disconnected from reality. This summer, nearly half of Americans said we were in a recession, which is just incorrect. In April, Americans said it was the worst time to buy stocks in almost 20 years. But the S&P 500 had surged 14 percent in six months leading up to April, and stocks are up another 11 percent since then.

Discounting the pessimism of tens of millions of Americans would be crass. But something important and weird is going on here. The writer Kyla Scanlon has memorably diagnosed what we’re experiencing as a “vibecession,” in which people are happily contributing to a growing economy even as they externalize the vague anxiety that everything is about to fall apart. In a similar vein, I wrote an article titled “‘Everything Is Terrible, but I’m Fine,’” noting that people in surveys keep saying they are depressed about the state of the national economy but hopeful (and even happy) about the state of their household economy.

At this point, you might be thinking, Wait, what does all of this have to do with our central question? Well, here’s a complex and unprovable theory: Maybe the recession doomers got the economy very wrong precisely because they were so convincing. A sense of economic dusk took the edge off spending, hiring, and wage growth, and that, in turn, reduced inflation without as yet causing a full-blown recession.

So, this is my favorite theory: The vibecession prevented the real recession. In medicine, weaker versions of a virus, like the flu, inoculate people against the real thing. By analogy, Fed Chair Jerome Powell and his melancholy minions essentially administered an injection of mostly safe gloom into the economic bloodstream, which seems to have triggered just the right level of macroeconomic immune response to reduce inflation without causing a downturn.

Or maybe all of these theories are true at once. Economic forecasts are genre fiction. America Rasputined its way out of the crisis years. The Fed’s titrated pessimism successfully reduced inflation at the margins. And maybe the very act of writing this article guarantees that we’ll have a recession at the end of this year.

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Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

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OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.

Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.

Business, building and support services saw the largest gain in employment.

Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.

Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.

Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.

Friday’s report also shed some light on the financial health of households.

According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.

That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.

People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.

That compares with just under a quarter of those living in an owned home by a household member.

Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.

That compares with about three in 10 more established immigrants and one in four of people born in Canada.

This report by The Canadian Press was first published Nov. 8, 2024.

The Canadian Press. All rights reserved.

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Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

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The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

This report by The Canadian Press was first published Nov. 7, 2024.

Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

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Trump’s victory sparks concerns over ripple effect on Canadian economy

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As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

More than 77 per cent of Canadian exports go to the U.S.

Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

This report by The Canadian Press was first published Nov. 6, 2024.

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