As this year ends, and I am thinking about how to think about the one ahead, I reflect on the one thing that surprised me the most in 2023. As 2022 ended, I expected that the US would slip into recession during 2023. The US, in fact, posted very strong growth this year. Investors who had thought the way I did and adopted a defensive investment stance would have missed out on strong performances from risky assets. Most notably, the S&P 500 returned 23% in 2023 to date.
At the end of 2022, economists surveyed by Bloomberg forecast that the US economy would grow by a miserable 0.3% in 2023. The same group now expect that economy grew by an above potential 2.4%. The median member of the Federal Open Market Committee, the body that sets monetary policy for the US, expected that growth during 2023 would average 0.5%, with some members even expecting a contraction of 0.5%. They now think the economy grew by 2.6% on average this year.
There were some important factors underpinning the US recession view at the tail end of 2022, the most salient being tight monetary policy. The FOMC had just subjected the US economy to the most aggressive monetary policy tightening in a generation. It had hiked rates seven times by a cumulative 425 basis points between March and December. It was difficult to imagine that the US economy, or any other, could take as severe a contractionary shock as that imposed by the Fed and remain standing. Furthermore, fiscal support was expected to remain weak after the generosity afforded to households and firms in 2020 and 2021; inflation, though slowing, was still high and eating into real incomes; and the global economy remained in the doldrums.
Yet the US economy kept going, confounding many. What we missed was the support to household spending from pandemic era savings. Real incomes were under pressure from high inflation, but consumers had saved during lockdowns and were able to cushion their lifestyles. Labour supply in the US had also not recovered from lockdowns as some people decided to stay out of the workforce permanently on reopening. This resulted in persistent labour shortages. The job losses that would typically induce and fuel recessions have therefore not occurred. The savings and labour supply stories were both unique to the pandemic, creating a rift between historical relationships and reality.
This was not the only time analysts got the US economy profoundly wrong. At the end of 2021, economists thought CPI inflation in the US in 2022 would average 4.4%, the outcome was 8%. The median FOMC member was expecting the Fed’s target measure of inflation, core PCE deflator, to average 2.7% in 2022. The actual number was 5.2%. Though the Russian war explains some of this, some of the error in forecasting was pandemic-related. Strong demand due to pandemic era fiscal and monetary support, pent-up demand after reopening and supply chain snarl-ups had all combined to raise US inflation to levels last seen in the early 1980s, even before Russia invaded Ukraine
The US economy is one of the most analysed and well understood economies in the world. There is publicly available data tracking minutia of activity, and armies of highly educated people whose job it is to make sense of it and predict what will happen next.
The Fed alone “employs more than 500 researchers, including more than 400 PhD economists”. Yet policymakers risk losing credibility and investors’ money because experts keep getting things wrong. I argued in 2020 that the pandemic had introduced discontinuities and likely changed fundamental relationships in economies in unpredictable ways. Forecast error is now higher than it was pre-pandemic, making things difficult for those who set policy and for investors. The macroeconomic foresight we all rely on could still let us down. As I go into 2024 I am more convinced than ever that one must exercise humility in making predictions and acting on them. May we all have better foresight in 2024.
• Lijane is global markets strategist at Standard Bank CIB.
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