{"id":170027,"date":"2024-04-01T13:43:10","date_gmt":"2024-04-01T19:43:10","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=170027"},"modified":"2024-04-20T07:09:09","modified_gmt":"2024-04-20T13:09:09","slug":"recession-predictions-why-they-are-often-wrong","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/recession-predictions-why-they-are-often-wrong","title":{"rendered":"Recession Predictions: Why They\u2019re Often Wrong, and Why the Narrative Continues to Switch"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC2655238848\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC2557298961\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">On any given day, depending on who you ask, we are either years away from the faintest possibility of a recession or about to enter one. Economists have made several dizzying U-turns in their predictions over the past couple of years, with the latest narrative claiming a recession is&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.businessinsider.com\/recession-outlook-economy-markets-downturn-investors-finance-fed-interest-rates-2024-1#:~:text=The%20vast%20majority%20of%20economists,in%20the%20next%2012%20months.\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">highly unlikely<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in 2024 and subsequent years.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">That\u2019s a stark change in tone from only a year ago. A poll of 70 economists by<\/span><em><span data-preserver-spaces=\"true\">&nbsp;The Wall Street Journal<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;in January 2023 put the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.wsj.com\/articles\/despite-easing-price-pressures-economists-in-wsj-survey-still-see-recession-this-year-11673723571\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">odds of a recession at 61%<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Yet at least one independent economist, James F. Smith, dissented and put the odds of a recession at a minuscule 1%. We already know who was right in 2023, but what was the reasoning behind the confident 1% prognosis?<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As of last month, we\u2019re seeing rosy prognoses for the U.S. economy. Many experts, including Goldman Sachs\u2019 chief economist, forecast that a recession is now highly unlikely in the coming years.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Let\u2019s unpack why the economic forecast keeps vacillating between extremes.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The (Un)Likelihood of a Recession: The Strong Labor Market Argument<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The first point James Smith stressed was the robust labor market\u2014a point that is now being reiterated by other economic forecasters. Smith has been&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.investopedia.com\/about-that-recession-we-were-all-bracing-for-8419748\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">quoted as saying<\/span><\/a><span data-preserver-spaces=\"true\">: \u201cWe have record numbers of people employed, earning more money than ever before. They\u2019re feeling reasonably confident, not phenomenally confident, but reasonably so. People are in pretty good financial shape.\u201d&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">How true is this statement? Technically, U.S. unemployment remains low. Jobless claims also remain at&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/ny1.com\/nyc\/all-boroughs\/business\/2024\/02\/29\/u-s--applications-for-jobless-benefits-rise-but-remain-historically-low#:~:text=They%20have%20remained%20at%20historically,212%2C500%20from%20the%20previous%20week.\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">historically low levels<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, unemployment levels are growing\u2014slowly but consistently. The&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bls.gov\/news.release\/laus.nr0.htm\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">national unemployment rate<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;rose from 3.7% to 3.9% in February and was 0.3% higher than a year ago.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Setting the relatively encouraging numbers aside, though, the labor market looks less confident when we consider the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.businessinsider.com\/layoffs-sweeping-us-these-are-companies-making-cuts-2024\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">mass layoffs among top companies<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;like IBM, Alphabet\u2019s Google, Microsoft, and Goldman Sachs in 2023. The trend is continuing this year. Google, for example, has already laid off hundreds more workers this year.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Moreover, hiring isn\u2019t exactly booming. Macroeconomist Guy Berger&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/twitter.com\/EconBerger\/status\/1765396629148877238\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">tweeted<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in early March that if you look at employment data more closely, \u201chires are consistent with an unemployment rate around 5.5%.\u201d&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It\u2019s true that people aren\u2019t being laid off en masse, but employment mobility is slow because companies are reluctant to replace workers. Employment policy analyst Matt Darling&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.businessinsider.com\/economy-housing-market-mortgage-buying-car-interest-rates-new-jobs-2024-3#:~:text=And%2C%20it&#039;s%20much%20lower%20than,a%20center%2Dright%20think%20tank.\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">told&nbsp;<\/span><em><span data-preserver-spaces=\"true\">Business Insider<\/span><\/em><\/a><span data-preserver-spaces=\"true\">&nbsp;that \u201cemployers are hiring as if there&#8217;s a relatively weak labor market, not a strong one.\u201d<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It\u2019s not that the labor market is doing badly\u2014it\u2019s just that it\u2019s not exactly doing well; it\u2019s certainly not doing as well as it should be, given the strong economic growth the country is experiencing overall.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Taming of Inflation: Success or Failure?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Now, let\u2019s look at the other indicator James F. Smith identified as pointing to a low likelihood of a recession in 2023: the drastic measures introduced by the Federal Reserve to curb rising inflation. Fiscal tightening led to&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.goldmansachs.com\/intelligence\/pages\/why-the-us-money-supply-is-shrinking.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">the lowest money supply levels in 70 years<\/span><\/a><span data-preserver-spaces=\"true\">\u2014and, yes, inflation did eventually begin coming down.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This \u201ceventually\u201d is significant. Let\u2019s go back to early 2021. That\u2019s when inflation first began gaining pace\u2014not in mid-2022, by which time it was at a crazy-high 9.1% and a huge problem for the Fed. Back in 2021, though, despite clear indications that inflation was rising, Jerome Powell kept saying that inflation would be \u201ctransitory.\u201d<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The fact remains that the Federal Reserve got the source of inflation fundamentally wrong. \u201cThe Fed thought the source of the inflation that began in the post-pandemic era was excess demand, and you could understand why they may have thought that if they didn\u2019t do their homework,\u201d Nobel Prize laureate Joseph Stiglitz&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnbc.com\/2023\/09\/01\/bad-economics-stiglitz-explains-how-the-fed-went-wrong-on-inflation.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">told CNBC<\/span><\/a><span data-preserver-spaces=\"true\">. The inflation was actually caused by the post-pandemic shortage of materials and industrial components like semiconductor chips.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This serious blunder does raise questions about the entire handling of the recent inflationary spike. Besides, we\u2019re not out of the woods yet. The Fed\u2019s goal of inflationary rates of under 2% has not been reached.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The latest&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.usinflationcalculator.com\/inflation\/current-inflation-rates\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">data from the U.S. Labor Department<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;give an inflation rate of 3.1% as of the end of February. It\u2019s not 9%, of course, but even all the rate hikes so far haven\u2019t brought it down to target levels. There is still widespread talk of rate cuts in 2024, but can they really be justified at this point?<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Let\u2019s return briefly to James F. Smith\u2019s earlier statement that people are \u201cfinancially in good shape.\u201d What this really means in practice is that people who already&nbsp;<\/span><em><span data-preserver-spaces=\"true\">were<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;in good financial shape pre-2021 have remained so, more or less. However, huge numbers of people are finding themselves locked out of key purchases, most notably real estate.<\/span><em><span data-preserver-spaces=\"true\">&nbsp;Business Insider&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">has memorably referred to this situation as a \u201c<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.businessinsider.com\/economy-housing-market-mortgage-buying-car-interest-rates-new-jobs-2024-3\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">trapped-in-place economy<\/span><\/a><span data-preserver-spaces=\"true\">.\u201d<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Yes, people are splurging on vacations and eating out using their credit cards, but is that really a picture of people who are financially in good shape? U.S. households&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.marketwatch.com\/guides\/banking\/american-debt-2024\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">carried all-time-high levels of debt<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;into 2024, and the category that saw the largest increase was credit card debt.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Economists will tell you that high levels of credit card debt aren\u2019t a bad thing\u2014so long as the majority of people are able to manage their balances. Currently,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnn.com\/2024\/02\/25\/economy\/stocks-week-ahead-credit-not-alarming\/index.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">55% of Americans are repaying theirs in full<\/span><\/a><span data-preserver-spaces=\"true\">, which isn\u2019t bad. So, it appears that high levels of debt are reflecting a growing economy.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Unless, for some reason, that stops being the case. Lara Rhame, chief U.S. economist at FS Investments, told CNN: \u201cOur economy naturally grows because of a combination of productivity growth and population growth, so something has to really disrupt growth to make household balance sheets contract.\u201d&nbsp; &nbsp;&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Unknown Unknowns<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">This brings us to the final factor: the unknown unknowns that can indeed disrupt the economy in an unforeseen way. James F. Smith acknowledges: \u201cEvery recession is different. We\u2019re just trying to figure out how or why, and we don&#8217;t always figure that out. We just say, \u2018It&#8217;s a mystery.\u2019&#8221;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, what are these mysterious factors? Sometimes, they are central bank blunders. It seems that this time around, the Fed ultimately did the right thing. But they took surprisingly long to act and were wrong about the basic facts of the post-pandemic economy. Who is to say there will be no more mistakes?&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">All of this is not to say that the U.S. economy is definitely headed toward a recession or to dampen people\u2019s spirits. But even the&nbsp;<\/span><em><span data-preserver-spaces=\"true\">Wall Street Journal<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;argued back in January that although there won\u2019t be a recession, \u201c<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.wsj.com\/economy\/it-wont-be-a-recession-it-will-just-feel-like-one-1919267a\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">it will feel like one<\/span><\/a><span data-preserver-spaces=\"true\">.\u201d<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For people trying to change jobs, fix a broken car, buy a house, or make money off a rental property, what material difference does it make whether there is a technical recession or an under-the-radar, lived experience?<\/span><\/p>\n\n\n\n<p><em><span data-preserver-spaces=\"true\">Let us know in the comments below.<\/span><\/em><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_c3eec55aa7fe656a9b2471190b7c6c11\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_2b70b2298da4b944babcd7bcce77f0b0\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p><\/p>\n\n\n\n<div id=button-custom-event-block_9e4687212297691c9703513bfde66ff1 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Lender Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/recession-predictions-why-they-are-often-wrong&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/recession-predictions-why-they-are-often-wrong&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Why do recession predictions always make it into the mainstream? And why are they always changing, and often wrong?<\/p>\n","protected":false},"author":613618,"featured_media":170029,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7383,7119],"tags":[],"class_list":["post-170027","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economics","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/170027","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613618"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=170027"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/170027\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/170029"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=170027"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=170027"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=170027"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}