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If you\u2019re a bit stumped by where the economy\u2019s headed, don\u2019t worry\u2014you\u2019re not the only one. <\/p>\n
A recent note from Goldman Sachs<\/a> highlighted that even economic forecasters<\/a> have been \u201chumbled\u201d by the economy over the past five years, proving their predictions wrong<\/a>, repeatedly, on massive scales.<\/p>\n Of course, forecasters\u2014like policymakers and the public\u2014were navigating the fallout of a black swan event of COVID, so some errors here and there are perhaps to be expected. <\/a><\/p>\n But, as chief economist Jan Hatzius highlights, forecasters did\u2014en masse<\/em>\u2014make three \u201cbig\u201d errors\u2014and that\u2019s discounting the \u201cinitial collapse [of the pandemic], which was the definition of an exogenous shock.\u201d<\/p>\n The first \u201cbig error\u201d Hatzius outlines was actually a welcome surprise. <\/p>\n He writes that in the spring of 2020: \u201cForecasters massively underestimated the potential for a V-shaped recovery. <\/a><\/p>\n \u201cThey failed to realize that because the downturn was the result of a deliberate shutdown of the economy because of a health emergency, it would reverse very quickly as soon as the health emergency abated.\u201d<\/p>\n This point, Hatzius is keen to highlight, Goldman Sachs \u201cgot right\u201d as it did not subscribe to the consensus view.<\/p>\n The second error, which Goldman joined its peers in getting wrong, occurred in 2021. <\/p>\n \u201cThe consensus of forecasters massively underestimated the potential for a sharp rise in inflation<\/a> because their views were conditioned by the low and stable inflation rates of the prior 30 years,\u201d Hatzius writes in the note seen by Fortune<\/em>.<\/p>\n Here, hindsight is 20\/20 and would have saved Jerome Powell a lot of work. Currently, the Fed is battling inflation back down to a target of 2% after it spiked at 9.1% in June 2022.<\/p>\n Currently the rate of consumer price increases sits at 3%<\/a>. Forecasters expect the Federal Reserve committee to begin cutting rates in September.<\/p>\n The third error occurred between 2022 an 2023, when forecasters widely predicted a recession<\/a> would be needed to bring inflation back down to acceptable levels.<\/p>\n \u201cIn case you were wondering, we got this one right in the sense that we didn\u2019t expect a\u00a0recession, although growth has been even stronger than our forecast over the past 18 months,\u201d Hatzius says.<\/p>\n While Hatzius frames this oversight particularly in 2022 and 2023, still not everyone would agree with the notion that the U.S. will avoid a recession.<\/p>\n Just ask Jamie Dimon, CEO of JPMorgan Chase<\/a>. While the market is largely pricing in a soft landing, the Wall Street veteran puts the odds of this outcome as between 35% and 40%.<\/p>\n \u201cThere\u2019s always a large range of outcomes and we will all get through that. And so I\u2019m fairly optimistic that if we have a mild recession, even a harder one, we\u2019d be okay,\u201d Dimon told CNBC this week.<\/a><\/p>\n \u201cOf course, I\u2019m very sympathetic to people who lose their jobs. You don\u2019t want a hard landing. But there\u2019s a lot of uncertainty out there,\u201d he added.<\/p>\n Hatzius agrees: \u201cThe caveat is that we\u00a0might\u00a0still be on the road to recession. But forecasters\u00a0themselves\u00a0now think that they previously made an error.\u201d<\/p>\n A healthy response to a mistake is to learn from it\u2014and that\u2019s exactly what Hatzius intends to do. <\/p>\n Lesson one, he writes, is: \u201cWe paid far too little attention to the huge imbalances in various durable goods markets, especially autos.\u201d <\/p>\n The demand for cars vs supply<\/a> was unexpectedly disrupted due to semiconductor production issues in Asia. <\/a>This imbalance lead to a surge in auto prices which, at its peak, contributed to between two and three percentage points to core CPI.<\/p>\n The second lesson is a greater focus on the rental housing market. <\/p>\n Hatzius explains: \u201cThe imbalance there was plain to see in 2021, when the rental vacancy rate\u2014and especially the rental\u00a0apartment\u00a0vacancy rate\u2014plunged to record low levels.<\/p>\n \u201cIn turn, this massive tightening showed up quickly in a surge in rents on new leases<\/a> \u2026 We did not pay enough attention to these indicators in 2021. This proved costly as these measures sent a very strong signal that rents in the more lagging official CPI and PCE measures were about to accelerate dramatically.\u201d<\/p>\n The final lesson is to identify further metrics to analyze labor market tightness. <\/p>\n Hatzius admits that he himself had been \u201ccomfortable\u201d the labor market was not hot enough to push up core inflation because the unemployment rate was above 5% and the employment\/population ratio was two to three percentage points below its February 2020 level.<\/p>\n But he adds: \u201cBut we were looking at the wrong labor market indicators, as we realized in early 2022, when we introduced the concept of the jobs-workers gap, defined as the difference between job openings and unemployed workers. It showed a much tighter labor market<\/a>.\u201d<\/p>\n Hatzius adds he has room for optimism about the future, courtesy of inflationary factors cooling and a loosening of the labor market. <\/p>\n \u201cWe need to know how this ends,\u201d Hatzius continues. \u201cCan we actually bring inflation back down to the target without a recession? We think the answer is yes.<\/a>\u201c<\/p>\n \u201cWe are optimistic that core [personal consumption expenditure] inflation will continue to fall toward 2%. And we are optimistic that unlike in past disinflationary episodes, this can be achieved with continued solid GDP growth.\u201d<\/p>\n<\/div>\nWhat they got wrong<\/h2>\n
Lessons learned<\/h2>\n
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