Economists were mostly dead wrong about America crashing into recession. Just look at how they’ve changed their minds
Last year, most economists were convinced that a recession—whether “garden variety” or something akin to “another Great Depression”—was on the way. The Federal Reserve’s aggressive interest-rate hiking campaign, designed to tame inflation, would eventually slow economic growth to a standstill, they claimed, sparking a wave of layoffs across the nation. But that hasn’t happened.
Throughout 2023, many top Wall Street economists, CEOs, and billionaire investors have been forced to delay or revise their pessimistic forecasts. Months of steady job gains, fading inflation, and resilient consumer spending have bolstered the case for a “soft landing”—where inflation is controlled without the need for a job-killing recession. Just take a look at the polls.
Last December, 70% of economists polled by Bloomberg expected a U.S. recession within the next 12 months. But this month, that number fell to just 58%.
Similarly, in a December poll from the National Association for Business Economics (NABE), 58% of economists said they believed there was a more than 50% chance of the U.S. entering a recession in 2023. But over the past six months, they’ve had a change of heart. In July’s NABE poll, 71% of respondents said they now believe the probability that the U.S. enters a recession in the next 12 months is just 50% or less.
The poll of dozens of economists employed across numerous industries, collected between June 30 and July 12, also showed fading wage pressures coupled with rising sales and profits.
“A majority of panelists is more confident about the economy over the next year,” Carlos Herrera, NABE’s Business Conditions Survey chair and chief economist at Coca-Cola North America, said of the results in a statement, noting that economists “see the probability of a recession diminishing.”
Investment banks’ increasingly bullish forecasts
Business economists aren’t the only ones who are growing increasingly optimistic about the future of the U.S. economy either. A number of investment banks have revised their recession forecasts this year, including Bank of America. The bank’s chief U.S. economist, Michael Gapen, predicted last summer that a “mild recession” would hit the U.S. economy by the end of that year amid the Fed’s economy-slowing rate hikes, but he now argues the downturn won’t come until 2024.
Goldman Sachs, which has held a rosy view of the U.S. economy in comparison with its peers over the past year, also revised its forecast from a 35% chance of recession over the next 12 months to just 25% in June. The investment bank’s economists argued that the threat from regional banks’ issues, headlined by the collapse of Silicon Valley Bank in March, has faded and the housing market is stabilizing.
Then, after year-over-year inflation fell to just 3% in June, Goldman lowered its forecast once again, arguing there is now just a 20% chance of a U.S. recession over the next 12 months.
“Recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” the investment bank’s chief economist, Jan Hatzius, wrote in a July 17 note.
Pride before the fall?
Experts becoming increasingly bullish about the future of the U.S. economy recalls a basic lesson from the Book of Proverbs: “Pride goeth before destruction, and a haughty spirit before a fall.”
The simple warning, that overconfidence can lead to misjudgment of one’s own abilities, isn’t often referenced by economists—but these incorrect recession calls suggest that it should be.
In February 2008, just months before the collapse of the 158-year-old investment banking powerhouse Lehman Brothers would make it clear that the Global Financial Crisis (GFC) was underway, then–Fed Chair Ben Bernanke told Congress that although the “economic situation” had become “distinctly less favorable,” he still didn’t foresee a U.S. recession. And his view was widely supported by economists. Take Moody’s Analytics chief economist Mark Zandi as an example. In September 2007, the top economist said that he believed a recession wasn’t likely despite concerns from Wall Street. “I’m fundamentally optimistic we won’t see job loss,” he told reporters at the time.
Economists’ inability to forecast the GFC of 2008 was so obvious and concerning that multiple peer-reviewed papers were written on the topic. The most famous of these is “The Financial Crisis and the Systemic Failure of Academic Economics,” which was written by eight economics professors. The paper rebuked economists for failing to predict the GFC owing to their use of models which often “disregard key elements driving outcomes in real-world markets.”
With this potential for miscalculation in mind, there are still a number of leaders in economics who remain cautious about the future.
Brent Schutte, chief investment officer of the Northwestern Mutual Wealth Management Co., told Fortune that although the odds of a soft landing have increased, he still believes a recession is coming this year or early next year, even if “it will fortunately be mild, shallow, and short-lived.”
And James McCann, deputy chief economist at Abrdn, a Scottish investment company with £376 billion in assets under management, also believes the path to a soft landing is “widening slightly” as inflation falls. But with the Fed set to hike interest rates again later this month, he added: “We still think this drag culminates in recession around the turn of the year.”
And Andrew Patterson, a senior international economist at Vanguard, told Fortune that he still assigns a “high probability to a recession either this year or next,” arguing it will be necessary to bring inflation durably back to the Fed’s 2% target.