Macro Van Winkle’s 2024
Waking up to a Soft Landing?
It has been over a year since many predicted that a recession would occur at some point in 2023. Macrosight was less sure than others, and given the GDP data up to that point, Macrosight guessed real GDP growth would be positive in 2023 (in spite of rising interest rates).1 Shortly after that post, perhaps fatigued by a case of forecasting over-exertion, Macrosight lapsed into a year-long slumber.
Now, much like Rip Van Winkle waking up to a new world, Macrosight finds the macroeconomy on the precipice of the coveted “soft-landing.” The fantasy of any central banker or monetary policy aficionado, a soft-landing implies that the central bank (in our case, the Fed) has slowed the economy just enough to bring inflation down without pushing the economy into a recession. With 2023 now behind us, the chances of said soft-landing seem relatively high (some are more certain than others).
The rate of inflation, whether measured by the CPI or the Fed’s preferred measure, the PCE, has come down. Real GDP has remained stable and should finish 2023 with something close to a 2.5 percent growth rate (based on the first three quarters of the year and the latest projection for the fourth quarter). The unemployment rate, too, remained below 4 percent for the entirety of 2023.
All of this is great economic news. One might even say that the concurrence of those three data-facts are remarkable. Yet, as pleasantly surprised as Macro Van Winkle was to awaken to such numbers, the bleary-eyed macro-enthusiast also wondered if maybe we shouldn’t be too surprised. In the least, if Macro Van Winkle was forced to guess what had happened whilst asleep, the history of our economy would suggest the following best bet: GDP growth in 2023 was positive.
Macro Van Winkle’s Bet
The reason for such a bet is simple. We have been up way more times than we have been down. We can see that in the figure of real GDP below, pasted in from FRED®, which shows the annualized quarterly growth rate of real GDP since 1947. Clearly, positive rates of real GDP growth outnumber the instances of negative rates.
In fact, the “ups” of real GDP growth dramatically outnumber the “downs,” which you can see broken down in the table below.
Out of 306 quarters—from 1947 through the third quarter of 2023—real GDP has been positive in 261 of them. That is, on a quarterly basis, our macroeconomy has had positive growth 85 percent of the time.
Hence, if one should find themselves rubbing the sleep out of their eyes like our friend Macro Van Winkle, and have no other knowledge than that specific history, the best forecast for what is coming next is positive. At least, given our history, that is the most likely outcome.
Buts . . .
“But,” you might be thinking to yourself, “Macro Van Sleepy is not accounting for the effect that interest rates will continue to have on the economy. Surely, it is reasonable to expect a recession in 2024, no?
Yes, that is reasonable, and any professional forecaster would account for such an effect. That was also the case for 2023, however. The Fed began raising their target rate in March of 2022, yet the economy still finished 2023 in the black (or so the data for the fourth quarter of 2023 will likely show).
Also if history is our guide, it is far more likely that real GDP growth for 2024 will be positive, regardless of whatever forces are currently in play. Keep in mind that for all 261 of those positive quarters there were also calamitous events such as wars, social unrest, and various other shocks to our lives, that could have sent our economy into recessionary doldrums. There are always the proverbial hoards amassing at the gate. Most of the time our economy is able to hang on and maintain positive growth.
“But,” you also might be thinking to yourself, “Past performance does not guarantee future performance!”
Yes, of course. It is certainly possible that real GDP could flip on us for the next 75 years. We could have more frequent recessions. Or, more than 15 percent of the next 75 years worth of quarters could show negative growth. That is possible, but probably unlikely. That would suggest some fundamental deterioration in the engine that is driving our economy—a decline in technology, a decline in the amount of capital equipment we are able to produce, or a decline in our skills. Again, all possible, but I suspect, unlikely. Such dramatic and deleterious forces do not appear to be at work within in our economy (in spite of what doomsday preppers may believe).
So, at least for now, Macro Van Winkle, awake after a year-long hibernation, is cautiously optimistic about 2024.
By “real” GDP, I mean GDP that is calculated with constant prices, or prices held constant. Also referred to as “inflation-adjusted” GDP.