Why are US economic forecasts consistently wrong?

VnExpress•28/07/2023

According to experts, the US economy is exhibiting many characteristics "unprecedented" in previous growth and recession cycles.

The U.S. Commerce Department announced today that GDP grew 2.4% in the second quarter (adjusted for the same period last year). This rate is higher than the first quarter and exceeds the 1.8% growth forecast by analysts in a survey by data firm Refinitiv.

Consumer spending increased by only 1.6% in the second quarter (adjusted on an annual basis), lower than the 4.2% in the first quarter, but still enough to boost growth as it accounts for the majority of economic activity and contributes nearly half of the total GDP growth.

Americans are benefiting from a strong labor market, with recent wage increases outpacing inflation. The Labor Department reported that unemployment benefit claims fell by 7,000 last week to 221,000. This is a historically low level, matching the 2019 annual average.

In addition, business investment grew by 7.7% in the second quarter, a sharp increase from 0.6% in the first quarter. These two factors combined defied economists' earlier forecasts of a recession beginning in the middle of the year due to rising interest rates.

The second-quarter growth results boosted the prospect of a "soft landing," meaning the economy slowing down slowly and steadily rather than sharply and causing a recession. "We've passed the danger zone. Instead of leaning more toward recession, the situation is now balanced between the possibility of recession and not recession," commented Amy Crews Cutts, chief economist at consulting firm AC Cutts & Associates.

On July 26, the US Federal Reserve (Fed) raised interest rates by 25 basis points (0.25%), bringing the benchmark rate to around 5.25-5.5% - the highest since 2001. Fed Chairman Jerome Powell said confidence in the possibility of a soft landing had increased.

Fed officials are no longer predicting a recession as they had at the beginning of the year.

The U.S. economy has expanded by more than 2% over the past year, after a slight slowdown in early 2022. Growth has nearly matched the pace recorded in the decade before the pandemic. Many economists still forecast a slowdown in U.S. growth later this year and into 2024, but recession fears have eased. The Conference Board reported that U.S. consumer confidence continued to improve in July. Consumers were less worried about a recession and many expressed optimism about the future.

Small businesses are also feeling better about the economy. In July, 37% of small businesses believed the economy would worsen over the next 12 months, the best rate since February 2022, according to consulting firm Vistage Worldwide.

The International Monetary Fund says economic growth in the US and globally this year is likely to be stronger than previously estimated.

Why are recession forecasts in the US consistently wrong, making it increasingly difficult for experts and businesses to predict the future?

Essentially, the current economic characteristics and context have many unprecedented aspects compared to previous growth and recession cycles of this superpower.

According to the U.S. National Bureau of Economic Research, the academic organization that defines the country's business cycles, the U.S. has experienced 12 expansions and 13 recessions since 1945. Until 1981, expansions lasted an average of 3.7 years and typically ended with the Fed raising interest rates to combat inflation.

But in 1981, then-Fed Chairman Paul Volcker orchestrated a deep recession that allowed inflation to fall for an extended period, eventually stabilizing at around 2%. In 1984 and again in 1994, the Fed raised interest rates before inflation truly exploded, and both times the economy went on to grow for six consecutive years thanks to globalization, labor force growth, and technological advancements.

The four periods of economic expansion since 1981 lasted from six to nearly eleven years. Instead of inflation, these four periods typically ended with some kind of rupture, for example, the tech recession in 2001, the housing bubble burst in 2007. The record-breaking nearly eleven-year period of growth that ended in February 2020 was exceptional, not due to inflation or the financial crisis, but to the pandemic and lockdowns. Without Covid-19, it could have continued even longer.

So, is the current cycle more similar to cycles before or after 1981? On the surface, the economy is very similar to the cycles of the 1960s and 1970s in that it is overheating and plagued by inflation. But the Fed has never had a "soft landing" when inflation was far above its target and the labor market was as tight as it is now.

But the economy also shares similarities with post-1981 cycles in that cracks have appeared in several areas due to rising interest rates. This year, three US banks have collapsed, but the situation has not spread further and the impact has been modest.

In a report this week, Bank of America economists said that much of the risk of interest rate hikes has been absorbed by the Fed or central banks through Treasury bond purchases. The good news is that "the Fed has the mandate, the tools, the sensitivity, the data, and the experience to address emerging tensions in the banking system," the bank assessed.

Therefore, although there are similarities to the recessions after 1981, the imbalances that led to past financial crises do not seem to be present anymore.

The root causes of inflation, the reasons why the Fed had to intervene to bring the economy down, are also different. In the past, inflation was usually caused by demand exceeding supply. This time, a bigger culprit is the disruption of supply – goods, transportation, commodities, labor – following the pandemic and the Ukraine conflict.

Supply is recovering and strong labor demand is being met, with the proportion of the population aged 25 to 54 who are employed or seeking employment now higher than before the recession. And although the labor market is tight, the price-wage spiral remains unclear. Also, unlike before 1981, public long-term inflation expectations are remaining stable, at around 2% to 3%.

Inflation is also harder to control because the structural factors that helped reduce costs in previous decades are now reversed. Geopolitical tensions, protectionism, deglobalization, and an aging population are all making supply chains more expensive. Artificial intelligence may increase productivity, but at present, that is entirely hypothetical.

All of this means that the answer to when the US will experience a recession varies among experts and business leaders. However, according to WSJ analysis, if the Fed successfully achieves a soft landing, historical experience suggests that the US could continue to grow for another four or five years.

Phiên An ( according to WSJ )

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