Why So Many People Got This Year's Economy Wrong

Episode Summary

Executive Summary: The episode reviews why 2023 defied widespread recession forecasts despite aggressive Fed tightening, then previews 2024 risks. Bloomberg economist Anna Wong argues the economy absorbed rate hikes through delayed effects, strong household/corporate balance sheets, and slower transmission into labor and credit markets. She warns disinflation may be partly exogenous and that a credit crunch could emerge as revenues and income soften.

Main Topics: Why 2023 Avoided the Expected Recession (Priority: 5/5): The hosts and Anna Wong discuss how consensus recession fears at the start of 2023 proved wrong, even after one of the fastest Fed hiking cycles in history. How Bloomberg Economics Builds Recession Calls (Priority: 4/5): Wong explains their recession model, combining empirical indicators like yield curves and sentiment with theoretical models and NBER-style labor market analysis. Monetary Policy Lags and Uneven Transmission (Priority: 5/5): The discussion emphasizes that rate hikes have affected industrial production and inflation faster than expected, but labor and credit markets have responded more slowly. Disinflation, Supply Shocks, and the Fed (Priority: 5/5): Wong argues part of the inflation decline comes from supply-side normalization and China-linked goods prices, not just higher rates, so the Fed should not declare victory too early. Labor Market Signals vs. Hard Data (Priority: 4/5): The episode compares strong payroll and job-openings data with softer wage growth, more useful unemployment-flow measures, and concerns that official jobs data may overstate strength. 2024 Risks: Credit Crunch and Timing of the Downturn (Priority: 5/5): Wong says a recession may have started late in 2023, with 2024 likely to hinge on whether the Fed cuts fast enough and whether credit stress becomes a broader crunch.

Key Arguments: The 2023 economy surprised forecasters because inflation fell without the expected surge in unemployment or collapse in demand. Bloomberg Economics’ recession framework uses 13 indicators plus theoretical models, and it repeatedly pointed to a second-half-2023 downturn. Rate hikes have worked with lags that are visible in industrial production and inflation, but labor and credit markets have not fully adjusted yet. Households and corporations entered the tightening cycle with unusually strong balance sheets, delaying the usual recession transmission. Credit quality may be weaker than it appears because pandemic-era forbearance and score distortions may have inflated credit ratings. Disinflation is not purely a result of Fed policy; some of it may reflect China-led goods-price declines and broader global growth slowdown. Soft data like sentiment is informative but not decisive because it is heavily influenced by politics and lived experience of high price levels. Payroll strength may be overstated because a large share of job gains came from BLS birth-death adjustments and revisions may later reduce the apparent job growth. The most reliable recession indicator in Wong’s view is labor-market flows, especially when unemployed inflows exceed outflows. A softer landing is still possible in 2024 if the Fed cuts earlier and faster, but the biggest downside risk is a delayed credit crunch.

Data Points: NASDAQ annual gain: 41.24% - Mentioned at the start as a standout market statistic for 2023 S&P 500 annual gain: 23.1% - Referenced alongside NASDAQ gains as evidence of a strong market year Mortgage rates: below 7% - Cited as part of the year-end market/economic backdrop Unemployment rate: 3.7% - Highlighted as low despite disinflation and falling inflation CPI peak: around 9% - Used to contrast with recent inflation levels near the Fed’s target Core PCE estimate for November: 0.04% - Wong said this would round to zero and indicate very low monthly inflation Six-month annualized core PCE: about 2.0% - Projected to be right at the Fed’s target in November Core PCE forecast for end-2023: 3.2% - Noted as the FOMC’s downward revision in the SEP Core PCE forecast for March 2024: 2.2% - Bloomberg Economics outlook for the first half of 2024 Core PCE forecast for second half 2024: 2.7% - Wong said inflation could stabilize above target in late 2024 Labor-market lag of monetary policy: 18–24 months - Cited as the typical lag for rate hikes to affect the labor market Industrial production decline: over 1 year - Wong said IP had already fallen for more than a year and matched model contours BLS birth-death model share of payroll gains: about 40% of 3 million non-farm payroll gains - Used to argue official payroll growth may overstate labor-market strength Non-farm payroll gains: 3 million - Referenced when discussing possible overstatement in employment data Job openings ratio: over 1.8 vacancies per unemployed person - Mentioned as still high for much of the year, but not decisive in Wong’s framework Consumer credit growth among millennials: over 30% - Used to illustrate age-based distributional stress in the post-pandemic economy Household stock ownership by older adults: 70% of stocks owned by people older than 59 - Used to explain why older households may feel wealthier than younger ones Auto delinquency comparison: at the level of 2010 - Used as evidence of rising consumer credit stress Credit score distortion estimate: as much as 50 basis points - Wong said pandemic forbearance may have inflated measured credit quality Conference Board CEO survey recession expectation: almost 100% predicted a U.S. recession - Illustrated the depth of pessimism heading into 2023

Pivotal Quotes: "How did we have the biggest rate hike cycle ever, or one of them, without more slowing in the economic activity?" — Tracy Galloway / Joe Weisenthal: Central framing question of the episode about the 2023 economic surprise "The one area which the model says that two areas actually that says that the lags of freight hikes still have yet to really hit the peak is the labor market and also credit market." — Anna Wong: Core explanation for why recession risk may still be ahead despite falling inflation "The Fed should not be happy about 2.7 or 2.8% inflation." — Anna Wong: Wong’s warning that late-2024 inflation may remain above target even if it looks improved

Implications: Listeners should expect a delayed-policy-effects story to continue into 2024: softer labor data, possible credit stress, and a debate over whether disinflation is Fed-driven or supply-driven. Even if a recession emerges, it may look muted and be dated only later.