OPINION:
Holiday parties were tough for economists.
People asked: Is a recession coming? How bad will it be? The impolite reminded us of what we got wrong last year.
The soothsayers at the Federal Reserve may be getting smarter. Having been burned by terrible forecasts when inflation was too low during Chair Janet Yellen’s tenure and when price increases accelerated after the COVID-19 shutdowns ended, they peg the likelihood of a recession near 50% — a coin toss.
Hand your guest a silver dollar and let him flip for it.
The consensus among business economists is for a short or shallow contraction. The average forecast for 2023 GDP growth is 0.3%, with unemployment and inflation both close to 4.1%.
Given how fixated the economics profession is about the uncertain lags for the impact of Fed interest rate increases on growth, unemployment and inflation, how obsessed the Fed is with consumer and business expectations and the institution’s ill-placed confidence in the potency of its tools, we can expect the pace of interest rate increases to slow again soon.
The Fed may fall prey to the mistakes of the Arthur Burns era when it let up on the brakes too soon, and inflation reached double digits — something Chairman Paul Volcker slew by not paying attention to what people thought.
All this beckons what tech experts call “emergent behavior” risk. That’s when complex systems — really systems of systems like our financial markets or electrical grid — spin into disaster owing to one player misstepping or a small accident. A single default allegedly set off Lehman Brothers’ collapse or a tree branch crashing a power line in Ohio, creating blackouts for 50 million people.
No economist can predict whether China will exit “zero-COVID” without imploding, if Ukraine can survive a dark winter of Russian missiles and limited electricity, or if high interest rates in the United States will uncork another developing country’s debt crisis.
The violence at the Foxconn factories manufacturing iPhones and its impact on U.S. supplies illustrate the vulnerability of the global system to a few agitators when faced with inhuman conditions so often prevalent in China.
Those likelihoods can’t be adequately modeled into baseline forecasts, but all those could make 2023 and 2024 much worse than anticipated.
The reverse could happen too. President Xi Jinping comes up with a plan to guide local officials who imposed draconian municipal lockdowns; Russian retreats could turn into a rout at the hands of the Ukrainian military, and diversifying supply chains away from China could give key developing countries a growth lift.
Over the next few years, the United States will be forced to do business with unsavory regimes to purchase enough oil, but refinery capacity limitations will keep supplies tight. The labor market won’t get too easy for employers anytime soon, and the country faces a chronic shortage of housing.
Near-term inflationary pressures from energy, wages and housing may abate, but pushing inflation below 4% will prove tough. The Fed could be forced to maintain its benchmark interest rate above 5%.
However unpleasant inflation that high may be, we endured the same for several years after Volcker slew his dragon. Still, the U.S. economy is on the cusp of a much more dynamic period reminiscent of the New Economy of the 1990s.
Recent big layoffs in the tech sector are likely more permanent at what I call the non-tech techies — businesses that grew large by using the internet as a platform — such as Meta, Twitter and Uber. But the carnage at real innovators like Intel, Microsoft and Apple — read people who create the infrastructure — will be more in tune with a mild recession.
Beyond the tech sector, employers are still adding jobs.
The buildout of artificial intelligence and robots, improvements in distance working technologies, the spread of populations away from land- and tax-expensive cities like New York, electric vehicles and charging stations, less expensive alternatives to college and an upgrade in the technologies supporting local government will require massive amounts of new capital.
This time around, the cost of capital won’t be zero, but 5% or 6% interest rates with 4% inflation will make raising the needed capital still doable.
Investments will be more disciplined with less emphasis on quick riches through stock options. That will better support productivity growth and broadly rising living standards for folks who invest in new skills.
Think of how a zero cost of capital permitted Mark Zuckerberg to squander billions on the metaverse, but the devices created by Google, Apple and others will stimulate hypergrowth.
Having to first endure a recession, President Biden may not reap the political benefits of the dynamism about to uncoil, but four years from now, we will be feeling better no matter who is in the White House.
To quote President Ronald Reagan’s reelection campaign, “It’s morning again in America.”
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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