The Reason the Recession Hasn’t Happened Yet
Despite soaring prices and interest rates, businesses and consumers have proved surprisingly resilient.
What happened to that recession? The recession we were supposed to be in right now, I mean—the one that various forecasters assured us was a sure thing. The “writing is on the wall,” many economists believed in June. A downturn was “effectively certain” as of October. Maybe the dip was already here, some suspected, and we just had yet to notice it.
Or not. Unemployment is holding steady at its lowest rate in half a century. Layoffs are not increasing. The economy is growing at a decent clip. Wages are rising, and households are not reducing their spending. Corporate profits are near an all-time high. Consumers report feeling confident. So why were forecasters so certain about a recession last year, leading so many people to feel so pessimistic?
That question has a few answers—some technical, some philosophical, and some historical. But the fundamental reason the much-anticipated recession hasn’t arrived is that businesses and consumers have proved surprisingly resilient in the face of soaring prices and interest rates. And that resilience is in no small part due to policy: Washington fought the last recession well enough that it seems to have staved off the next one, at least for some period of time.
Perhaps the simplest explanation for why so many forecasters seem to have gotten it so wrong is that economic forecasting is hard. The economy is enormous, our knowledge of it imperfect, our data on it retrospective. The number of things that can go right and the number of things that can go wrong are both gigantic. And the sample of recessions available to model and study is minuscule. (The United States has been through just 12 in the post–World War II period.)
As a result, human beings are just not great at predicting a given country’s rate of growth. The Economist retains a database of annual GDP forecasts, now numbering more than 100,000. It has found that analysts tend to be off by 0.4 percentage points a quarter in advance, 0.8 percentage points a year in advance, and 1.3 percentage points two years in advance. (Those variations are significant, given that wealthy countries tend to have growth rates between zero and 4 percent.) The publication has also found that forecasters are the least accurate right before a recession hits. In other words, recessions are the hardest thing for analysts to forecast.
The would-be recession that we are not having at the moment? The available data gave us straightforward reasons to expect trouble. The global economy was slowing down, and the Federal Reserve was hiking interest rates to tamp down inflation, something that has reliably caused a contraction in the past. “Economists are stubborn adherents to history,” Mark Zandi, the chief economist at Moody’s Analytics, told me. “When inflation is high and the Fed is aggressively raising rates, recession most often follows.”
Why not this time? In part because of long-simmering bottlenecks and shortfalls in the economy. Rising borrowing costs led to a drop in new housing starts, as economists expected. But construction activity did not slow down, because the backlog of projects was so substantial. Similarly, the jump in interest rates dampened consumers’ ability to buy cars. Yet years of shortages, particularly in the used-car market, helped to sustain sales.
More important, the American labor market turned out to be much stronger than economists had realized, and the American consumer far more irrepressible, thanks to the policy response to the coronavirus pandemic. When COVID hit, the federal government spent trillions on small-business support and cash payments to families, meaning that low-income households did not reduce their spending despite the jobless rate reaching nearly 15 percent. Indeed, they actually increased their spending. What’s more, the strong policy response had the (honestly, a bit weird) effect of boosting private-sector wages: Workers dislocated from their jobs scored significant raises when they went back to work. At the same time, because of widespread labor shortages, businesses have proved loath to let workers go.
Of course, these dynamics are part of the reason so many economists expect a recession. The economy is so good that the Federal Reserve is trying to put a damper on it, to avoid high rates of inflation triggering a more chaotic and worse recession in the future. That might mean a slowdown sooner rather than later: Consumers have started to run down the cash cushion they built up during the early phase of the pandemic. Wage growth is stagnating. Inflation remains stubbornly high, despite the Fed’s rate hikes, meaning the central bank is likely to make borrowing yet more expensive. “With a bit of luck and reasonably good policy making by the Fed, the economy should be able to skirt recession,” Zandi told me. “The widespread pessimism has served the purposes of the Fed, since it has weighed on consumer spending and business investment, which are critical to cooling off the economy and getting inflation back in its bottle.”
Or it might turn out that forecasts of a recession were not entirely wrong—just early.