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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.
