Yesterday, the monthly consumer price index report, which measures inflation, came out and showed that inflation for December was negative. That is 6 months in a row now where inflation has slowed down compared to where it was during the first half of 2022. While annual inflation is still much higher than the 2% target the Fed has, it is, as of now, trending in the right direction. At the same time, the job market is as strong as ever with unemployment at 3.5%, tied for the lowest it has been since 1969.
The US economy, to say nothing of the global economy, has been through a lot over the last 3 years. Last year was definitely one for the record books. So much of what was thought to be known about how the economy works turned out to be wrong, in good and bad ways. You can see what I’m getting at, right? Predicting even the immediate future is hard. Predicting where things will be years from now is a fool’s errand.
Needless to say, I’m not going to make any predictions here. I won’t even bother trying to guess what things will look like in a few months. With respect to the US economy, it is, for now, almost in a goldilocks-type situation. Inflation is still high, but coming down, while unemployment remains low and plenty of jobs are being added each month. If that continues, the Fed will have achieved the proverbial soft landing, where inflation is brought down without causing unemployment to surge. That, too, would be one for the record books.
Just because the trends today are good does not mean they will continue. There is plenty of debate now about how aggressive the Fed should be in trying to tame inflation. Some argue it has done enough and should stop raising interest rates. Others argue it should continue to raise interest rates, but do it at a more modest pace. The latter group has won out for now, but nobody knows how much longer that will last. Everybody wants to achieve a soft landing, but there is no consensus on how best to do it.
Conventional wisdom, i.e., what economists, the Fed and businesses think, has shifted significantly since the second half of 2021. First, inflation was transitory and not something to be too concerned with. Then, inflation was entrenched and a recession was inevitable. Now, it seems conventional wisdom is becoming more open to a soft landing. I have never taken a position on any of that because I have no idea.
We are just not good at predicting large-scale, future events. Some of us have plenty of imagination, but it only goes so far. Our tendency is to stick to our ways, no matter what they are. If something has worked in the past, we stick to it even though it is not guaranteed to work again in the future. If historically X has happened after Y, then we assume that will continue no matter how different the circumstances are.
This here is an example of sticking to the fallacy of looking at past events to make future predictions and not accounting for the different circumstances. It discusses the high vacancy rate in the job market right now and argues that vacancy rates come down before unemployment goes up. The claim is that vacancies will fall, but unemployment will rise afterwards and there is no other possible outcome. In other words, a soft landing is impossible. The evidence? 9 such episodes going back to the 1950s. The problem? The sample size is very small and none of those episodes dealt with a pandemic or messed up supply chains on a global scale.
That is not to say unemployment will not rise, it very well might. What it is to say is that the world we are in now is markedly different from any world that came before it. Our experience with economic downturns is very limited and our experience with post-pandemic global economies is non-existent. There is nothing wrong with looking at what has happened before, but to do that and assume that whatever has happened before is set in stone and will happen again is a big error.The Future’s Uncertain and the End is Always Near — What Andy Thinks
Categories: Economic History