It has been almost a year since the Bureau of Economic Analysis announced a decline in real GDP, a commonly mistaken indicator of a recession. The right-wing media had a field day, labeling it the “Biden recession,” and even economists who knew better began predicting an upcoming recession. However, as of June, unemployment remains low and job growth continues, making these predictions appear unfounded.
Why were economists wrong? One possibility is that economists have a poor track record when it comes to predicting recessions. The International Monetary Fund conducted a study and discovered that economists rarely succeed in forecasting recessions. However, this study may not fully explain the situation we are currently witnessing.
Some forecasters were likely influenced by the inverted yield curve, a financial indicator historically associated with recessions. However, an inverted yield curve does not cause a recession; it is instead an implicit prediction about future Fed policy. Therefore, it merely reflects the prevailing consensus of an impending recession rather than providing independent evidence.
The consensus among economists may have stemmed from the belief that we were experiencing a repeat of the early 1980s, where high inflation led to a recession caused by the Fed’s interest rate hikes. However, this time around, the expected recession has not materialized, and the economy has been resilient despite significant rate hikes.
One reason for this resilience may be due to increased housing demand fueled by remote work opportunities. Additionally, the Biden administration’s industrial policies and investment subsidies have led to a boom in nonresidential investment, particularly in manufacturing.
Contrary to expectations, inflation has actually subsided despite steady job growth and low unemployment rates. This unexpected combination has defied the traditional narrative that a recession is necessary to control inflation.
In conclusion, the consensus among economists that a recession was imminent has proven false. The economy has defied expectations and continued to grow despite rate hikes and other potential factors. This situation is unusual, as there is typically a correlation between recession predictions and their occurrence.
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