Top 5 Misconceptions About the Economy in 2023

2023 is the year many experts get the economy wrong.

From false predictions of an impending recession to falling prices and errors about why they rose in the first place, 2023 was a year marked by economic chaos.

Even the Federal Reserve deviated, predicting an economic slowdown at the start of the year and then reversing that prediction in the summer.

The waffling prompted some major players in the financial industry, including JP Morgan Chase CEO Jamie Dimon, who called the Fed „100 percent wrong” for giving unreliable guidance.

“18 months ago central banks were 100 percent wrong. There should be humility in fiscal forecasting,” he said during a panel event in Saudi Arabia in October.

Here's a look back at some of the biggest misconceptions about the economy of 2023.

Rising interest rates are sure to cause recession

At the end of last year there was virtual certainty among economists that 2023 would see a recession. The debate is whether that recession will be short-lived and relatively shallow, or long and intense, leading to a major spike in unemployment.

„The recession we've been expecting for nine months now is nearing,” Deutsche Bank analysts Peter Hooper and David Folkerts-Landau wrote in November last year. „Our expectation of a US recession by mid-2023 has strengthened.”

That false forecast was based on the assumption that rising interest rates would directly slow the economy, shrink markets, and lay off workers.

„Economic downturns and the aggressive monetary tightening they trigger, as well as geopolitical and commodity shocks, will cause temporary pain in financials and emerging markets. We see major equity markets falling 25 percent from today's levels when the US recession hits, but fully recovering by the end of 2023.” , assuming the recession lasts only several quarters,” Folkerts-Landau and Hooper wrote.

But the central bank's tightening program did not lead to massive unemployment or a stock market crash. In contrast, GDP rose to a 4.9 percent quarterly increase in the third quarter.

The Dow Jones Industrial Average of major U.S. stocks has lost 7 percent since November 2022, up from 7 percent in March this year. The Dow has since gained 9.5 percent from that level. A lot of new achievements this month, And unemployment is below 4 percent.

Inflation should decrease and unemployment should increase

Economists have long linked inflation to unemployment because employment costs are the overhead paid by firms. In In the third quarter During the year, employee wages were 58 percent of actual prices, input costs were about 26 percent, and profits were 16 percent.

Many economists believed that higher interest rates would squeeze workers' paychecks to prevent inflation. Or so conventional thinking went.

„Continued inflation levels reduce the need for economic activity to bring inflation down to 2 percent…which will trigger job losses, which we expect based on the Fed's projections,” wrote Michael Weiss, president of investment firm Yieldstreet. Analysis at the end of last year.

But 2023 broke the link between unemployment and inflation.

Headline inflation, measured in the consumer price index (CPI), eased to just 3.1 percent in November from a 6.3-percent annualized rise in January and a high of 9 percent last year.

The personal consumption expenditures (PCE) price index, a different measure of inflation preferred by the central bank, fell from a 5.5-percent annual increase in January to just 2.6 percent in November — close to the central bank's 2-percent target.

The sharp decline in inflation came as the unemployment rate barely moved.. Since inflation peaked at 9 percent last June, unemployment has hovered between 3.4 and 3.9 percent — a far cry from the last forecast range of 6, 7 and 10 percent. Summer.

Wages did not rise for low-wage workers

Amid great concern about the rate and trend of inflation, Average hourly earnings All American workers are actually keeping pace Rising prices Since the pandemic began in March 2020.

In fact, earnings have risen 19.4 percent since February 2020, slightly higher than CPI's 18.8 percent in the same period. Low-wage workers have seen a greater share of these gains, contributing to narrowing income inequality in the United States.

For manufacturing and non-supervisory workers, the majority of American workers, their wages have increased by 21.9 percent since just before the pandemic, 3 percent more than the increase in the CPI.

Hospitality and leisure sector workers, some of the lowest paid people in the economy, saw their wages rise by 27 per cent over the same period.

“Pandemic… [reduced] capitalist market power and [spurred] Rapid relative wage growth among young non-college workers who have disproportionately shifted from low-wage to high-wage and high-productivity jobs” researchers Massachusetts Institute of Technology and the University of Massachusetts Amherst discovered earlier this year.

Rising markets and low unemployment make people feel better

Despite solid economic performance data and the salesmanship of the Biden administration, Americans are still gloomy about the economy — lamenting a disconnect and confusion over By many financial critics.

A December poll by Bankrate found that most Americans believe the economy is currently in a recession, with a majority of those earning less than $50,000 a year and those earning more than $100,000 a year saying the U.S. economy is in a recession.

The gloom has turned into a bad public opinion poll for President Biden. From a November poll call up Just 32 percent of Americans approve of his handling of the economy.

But the sentiment may return in a major way. The latest Michigan survey of consumer sentiment found a major brightening of economic mood across the board, reversing a fourth straight month of downward trends.

„These trends are rooted in substantial improvements in how consumers view the path of inflation,” the University of Michigan pollsters wrote. „All five index components rose this month, which has occurred in only 10 percent of the gauges since 1978. Expected business conditions rose more than 25 percent in both the short and long term.”

Inflation has a single, clear origin

Democrats and liberal economists have argued that inflation over the past year was primarily caused by supply-side disruptions, while Republicans and conservative economists have blamed inflation on excess demand, boosted by trillions of dollars in pandemic stimulus.

Other economists have argued that corporations should be blamed for taking advantage of consumer cash to raise their prices and increase their profit margins.

The impact of the war in Ukraine on energy prices and further variants of the coronavirus, which extended the pandemic into 2021, were also pointed to as culprits.

In fact, all these factors have contributed to varying degrees of inflation at the international level starting in 2021 and up to this year. Isolation of either cause ignores the dynamics between governments and the private sector that underlie economics and the international price system.

United Nations economists in their 2023 Trade and Development Report „Inflation Declines at Different Rates in Countries, Their Economic Structures”.

„As prices of key inputs rise, many situations allow firms to make higher profits by setting their prices to follow a general upward trend, even if goods are produced when the inputs are cheap,” they wrote. „Monetary policy should not be used as the sole policy tool to reduce inflationary pressures. Achieving fiscal stability requires a policy mix while supply-side issues remain unresolved.”