Top 5 misconceptions about the economy in 2023

Top 5 misconceptions about the economy in 2023

6 minutes, 34 seconds Read

2023 was a year in which many experts got a lot of things wrong about the economy. 

From mistaken forecasts about an impending recession to errors about falling prices and why they had risen in the first place, 2023 was a year marked by economic confusion.

Even the Federal Reserve got disoriented, predicting an economic downturn at the beginning of the year and then yanking that prediction over the summer.

This waffling peeved some major players in the financial industry, including JPMorgan Chase CEO Jamie Dimon, who called the Fed out for providing unreliable guidance and being “100 percent dead wrong.”

“Central banks 18 months ago were 100 percent dead wrong. Maybe there should be humility about financial forecasting,” he said during a panel event in Saudi Arabia in October.

Here’s a look back at some of the biggest misconceptions about the economy of 2023.

Rising interest rates are sure to cause a recession

There was virtual certainty among economists at the end of last year that 2023 would see a recession. The debate was whether that recession would be short-lived and relatively superficial or long and serious, entailing a major spike in unemployment.

“The recession we have now been anticipating for nine months draws nearer,” Deutsche Bank analysts Peter Hooper and David Folkerts-Landau wrote in November of last year. “Our expectation for a recession in the US by mid-2023 has strengthened.”

That incorrect forecasting was based on the assumption that rising interest rates would directly slow the economy, tanking markets and causing workers to be fired.

“The economic downturns along with the aggressive monetary tightening and geopolitical and commodity shocks that induce them will be temporarily painful in financial and emerging markets. We see major stock markets plunging 25 percent from levels somewhat above today’s when the US recession hits, but then recovering fully by year-end 2023, assuming the recession lasts only several quarters,” Folkerts-Landau and Hooper wrote.

But the Fed’s program of tightening led neither to mass unemployment nor to a stock market dive. On the contrary, gross domestic product surged to a 4.9-percent quarterly increase during the third quarter.

The most the Dow Jones Industrial Average of major US stocks lost from its November 2022, level was about 7 percent in March of this year. The Dow has since risen 9.5 percent above that level, setting several new records this month, and unemployment has remained below 4 percent.

Unemployment needs to go up for inflation to go down

Economists have long correlated inflation and unemployment in part because employment costs are the major portion of overhead paid by companies. In the third quarter of this year, employee compensation was about 58 percent of real prices, input costs were about 26 percent, and profits were about 16 percent.

To stop rising prices, many economists believed the Fed needed to put the squeeze on workers’ paychecks with higher interest rates and then watch consumer demand and overhead costs fall and prices along with them. Or so the conventional thinking went.

“Persistent levels of inflation suggest the need for reduced economic activity to cool inflation to 2 percent … This would spark job losses, which we do expect to see based on the Fed’s forecasts,” Michael Weisz, president of investment firm Yieldstreet, wrote in an analysis at the end of last year.

But 2023 unbuckled the correlation between unemployment and inflation.

Headline inflation as measured in the consumer price index (CPI) fell from a 6.3-percent annual increase in January off a high last year of nearly 9 percent to just 3.1 percent in November. 

The personal consumption expenditures (PCE) price index, a different measure of inflation preferred by the Fed, fell from a 5.5-percent annual increase in January to just 2.6 percent in November – close to the the Fed’s 2-percent target.

The sharp drop in inflation came as the jobless rate barely moved.. Since inflation hit its 9-percent peak last June, unemployment has stayed between 3.4 and 3.9 percent — a far cry from the ranges of 6, 7 and even 10 percent predicted last summer.

Wages aren’t rising for the lowest-paid workers

Amid so much concern over the magnitude and trajectory of inflation, average hourly earnings for all US workers have actually kept pace with rising prices since the pandemic started in March 2020. 

In fact, earnings have risen 19.4 percent since February 2020, slightly outpacing the increase in the CPI of 18.8 percent over the same period. Lower-wage workers have seen a greater share of these gains, contributing to a shrinking of income inequality in the US. 

For production and nonsupervisory workers, who account for the majority of the U.S. workforce, their wages have increased 21.9 percent since just before the pandemic, more than 3 percentage points higher than the increase in the CPI.

Hospitality and leisure industry staff, who are some of the lowest paid people in the economy, have seen their wages rise 27 percent over the same period.

“The pandemic … [reduced] employer market power and [spurred] rapid relative wage growth among young noncollege workers who disproportionately moved from lower-paying to higher-paying and potentially more-productive jobs,” researchers from the Massachusetts Institute of Technology and the University of Massachusetts Amherst found earlier this year.

Rising markets, low unemployment will make people feel good

Despite solid economic performance data and a lot of salesmanship from the Biden administration, Americans have still been gloomy about the economy — a disconnect lamented and puzzled over by many financial commentators.

A December poll from Bankrate found that most Americans think the economy is currently experiencing a downturn, majorities those earning under $50,000 annually and those making more than $100,000 a year saying they feel like the U.S. economy is in a recession.

This gloom has translated into poor public opinion polling for President Biden. A November poll from Gallup found that just 32 percent of Americans approved of his handling of the economy.

But sentiment could be turning around in a major way. The latest Michigan Survey of Consumer Sentiment found a major brightening of the economic mood across various categories, reversing a fourth-month downward trend.

“These trends are rooted in substantial improvements in how consumers view the trajectory of inflation,” University of Michigan pollsters wrote. “All five index components rose this month, which has only occurred in 10 percent of readings since 1978. Expected business conditions surged over 25 percent for both the short and long run.”

Inflation had a single, clear-cut origin

Democrats and liberal economists have argued that inflation during the past year was caused primarily by supply-side disruptions while Republicans and conservative economists have blamed inflation on higher demand, boosted by trillions of dollars in pandemic stimulus.

Other economists have said the blame should fall mostly with corporations who took the opportunity of consumers’ being flush with cash to raise their prices and boost their profit margins.

The Ukraine war’s effect on energy prices and further variants of the coronavirus that extended the pandemic in 2021 were also fingered as culprits.

In fact, all of these factors contributed to varying degrees to the inflation that took off internationally starting in 2021 and lasted into this year. Holding up any single cause as the lone perpetrator ignores the dynamics between governments and the private sector that underlie the economy and international price system.

“Inflation eases at different rates across countries, due to their economic structures,” United Nations economists wrote in their 2023 trade and development report.

“As the cost of key inputs accelerates, several circumstances allow firms to gain higher profits by setting their prices following the general increasing trend, even if the goods were produced when inputs were cheaper,” they wrote. “Monetary policy is not to be used as a sole policy tool to alleviate inflationary pressures. With supply-side problems still unaddressed, a policy mix is needed to attain financial sustainability.”

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