Somebody Has Got To Be Wrong

Eakinomics: Somebody Has Got To Be Wrong Yesterday Treasury Secretary Janet Yellen took to the airwaves to tout the Biden Administration’s accomplishments and argue that inflation was diminishing and economic growth remained strong. In short, a soft landing is in the offing and the administration (with a slight hat tip to the Federal Reserve) was responsible. It was pretty standard messaging in advance of the president’s State of the Union address tonight. Notably, the economics group at Goldman Sachs yesterday cut its estimate of the probability of recession over the next 12 months to 25 percent, a sharp contrast to the estimated 65 percent in a Bloomberg survey last month. This is not political messaging, and it also points to a soft landing. The optimists point to 4th quarter growth in gross domestic product at a 2.9 percent annual rate, stronger than had been anticipated earlier in 2022. There are also the blockbuster 517,000 jobs created, as shown in the January report. In addition to domestic momentum, global conditions are above expectations as well. Europe has experienced a mild winter, lower-than-anticipated energy costs, and has dodged a recession. China is, well, China, but Xi 2.0 has allowed the economy to open up and permit faster growth. Finally, optimists point to a moderation of inflation in the December consumer price index report, and reduced wage pressures in the 4th quarter employment cost index and January jobs report. Perhaps. But Eakinomics is not convinced and still puts the probability of recession above 50 percent in the second half of 2023. Yes, growth is stronger, but that just means inflation pressures are more durable. This raises the bar for the Fed and it will keep raising rates as necessary to tame the inflation. And the ballyhooed moderation in inflation is highly debatable. In April 2022, inflation measured by the market-based core personal consumption expenditures price index – the Fed’s preferred measure of inflation – was 4.9 percent. In December, it was 4.8 percent. That’s not a lot of progress, and no reason to believe the Fed can stand down anytime soon. There either will or will not be a recession in the next 12 months, and somebody is going to be wrong. But there has rarely been a moment with comparable dissent over the likely economic outlook.