Are we waiting for a "Godot" recession that might never arrive?

Economists have talked about a "Goldilocks" economy, one where there is just the right enough aggregate demand to put us at the full-employment GDP so that there is some economic growth and inflation and unemployment both stay low (see graph at the end of this post after the links to related posts).

Now there is talk of a "Godot" recession, one that everyone is waiting for but never comes, like in the famous play Waiting for Godot by Samuel Beckett where characters wait for someone named Godot who never arrives.

See Why the Recession Is Always Six Months Away by Nick Timiraos of The WSJ. Excerpts:

"“It’s the ‘Godot’ recession,” said Ray Farris, chief economist at Credit Suisse. Mr. Farris found himself among a small minority of economists last fall who predicted the economy would narrowly skirt a downturn this year. Every six months, economists have predicted a recession six months later, he said. “By the middle of the year, people will still be expecting a recession in six months’ time.”"

"Washington’s reaction to the initial shock of Covid-19 in March 2020, including holding interest rates at very low levels and showering the economy with cash, left household, business, and local government finances in unusually strong shape."

"Rate increases can slow the economy more immediately when expansions are fueled by credit growth, as opposed to incomes and stimulus, the big drivers of the postpandemic recovery.Businesses were able to lock in lower borrowing costs as interest rates plumbed new lows in 2020 and 2021."

"Home builders are resorting heavily to what’s known as buydowns, where they pay to lower the buyer’s mortgage rate for the first year or two. Many current owners are reluctant to sell because they’d have to give up a much lower rate, a phenomenon that is holding for-sale inventories at historically low levels."

"Construction employment hasn’t fallen despite a severe slump in home sales. Builders are still completing homes and apartments started before the Fed increased interest rates."

"In the auto sector, brands of popular fuel-efficient cars are benefitting from pent-up demand after shortages of semiconductor chips kept inventories of new cars at very low levels.

That could make the usual rate-induced slowdown in autos and housing more gradual, said Eric Rosengren, who was president of the Federal Reserve Bank of Boston from 2007 until 2021."

"U.S. consumers, throwing off their pandemic caution, have ramped up spending on services that require lots of workers—think dining out and travel"

"Consumer spending has enjoyed a rebound in recent months thanks to lower gasoline prices and an additional boost in January from bigger Social Security checks, which are indexed to prior-year inflation."

Related posts:

Fed Looks for Goldilocks Path as Jobless Rate Drops   (2018)

Can we get a soft landing or is the Goldilocks economy too good to be true? Two different views (2023)

Now the graph I mentioned above.

The more money in the economy, or the lower the interest rate, the more demand for all goods and services, holding all other factors constant (this total demand is called aggregate demand or AD). And at higher interest rates, there is less AD. The price level in the economy and the total output or quantity produced in the economy are determined by the interaction of AD and aggregate supply (in this case I am interested in something called short-run AS or SRAS-so yes there is a long-run AS but that is not the important issue here although in the long run we will come back to Q_F with even more inflation if we go past it in the short run). 

The full-employment GDP (Q_F in the graph below) is the level of GDP that gives us the natural rate of unemployment (there is always some unemployment because people are moving to new cities, some industries decline while others rise, etc). If we move from AD1 to AD2, we will still have very small price increases while having a big increase in GDP which will help lower the unemployment rate. But if we go past AD2 (if interest rates get too low), then we get much bigger price increases than for AD increases to the left of Q_F. So we want the Fed to set interest rates so that we are at AD2. But no one knows for sure what interest rate will do that. But we could say that we have a Goldilocks economy if we are at AD2.