When 2023 began, stocks were off their all-time highs by nearly 20%, inflation hovered above 6%, and the Fed was in the midst of its most aggressive rate hike cycle in decades in an attempt to bring inflation down towards its 2% target. The Fed signaled that more rate hikes were on the horizon for 2023, which promised more pressure on economic growth in the hopes of slaying the inflation dragon.
Given this gloomy economic backdrop, it would be hard to fault economists for not having a super rosy outlook for the U.S. economy. In fact, more than two-thirds of economists at 23 large financial institutions predicted a U.S. recession in 2023.1 Even the Fed’s growth projections for this year were predicting a recession. Looking at news headlines, a recession this year felt inevitable.
Stocks Ignored the Recession Headlines — If a recession was coming in 2023, stocks missed the memo. Despite the recession worries, stocks have managed to rally by nearly 20% year-to-date in large part due to a combination of a continued decline in inflation along with surprisingly resilient economic growth despite continued Fed rate hikes. A spike in optimism for the future of artificial intelligence has also been a contributing factor.
An Economist Joke — There’s an old line about economists that they’ve predicted 10 of the past 8 recessions. Its humor lies in its shades of truth. The Federal Reserve Bank of Philadelphia conducts a survey of economists and investors. Since the survey began in 1946, not a single recession was identified a year in advance. Further, economists completely missed the recessions of 1990, 2001, and 2008.2 It’s a good reminder that forecasters are paid for predictions, not to be right.
The Fed Changes Its Tune — Last month, the Fed hiked rates again by 1/4%. While this announcement came as no surprise, the bigger news came from Fed Chair Powell when he indicated the Fed no longer expected a recession given the surprising strength of economic growth in the face of higher interest rates.
It’s been said that economists are like generals in that they’re really good at fighting previous wars. That is, their models for predicting future economic outcomes are built upon past economic cycles and events but one thing we know for certain is that the future is surprising. When you consider that the current economic environment is a byproduct of the worst pandemic the world has seen in over a century, it should be even less surprising that economists’ recession predictions seemingly missed the boat. It’s a good reminder the next time news headlines have a sure-fire market prediction.
Weekly Tidbit Quote: “What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.” — Mark Twain
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