Predicted Economic Doom Never Arrived

See Jamie Dimon and Ray Dalio Warned of an Economic Disaster That Never Came. What Now? Many experts thought high interest rates would break the economy and inflation couldn’t be tamed by Gregory Zuckerman of The WSJ. Excerpts:

"In mid-2022, JPMorgan Chief Executive Jamie Dimon warned that a “hurricane” was about to hit the U.S. economy."

"Last year, Bridgewater Associates founder Ray Dalio predicted a “debt crisis” after earlier anticipating a “perfect storm” of economic pain.

High-profile investors and economists including DoubleLine’s Jeffrey Gundlach and Rosenberg Research’s David Rosenberg were just as fearful, with Gundlach last March saying a recession would come “in a few months.” Early last year, economists predicted a 61% chance of recession in 2023.

The experts were way off. They underestimated the impact of government stimulus and the resilience of consumers and businesses. And they were too skeptical of the Federal Reserve’s ability to push inflation lower without sparking a recession. The economy continues to grow at a steady clip. Inflation is getting closer to the Fed’s goal of 2%, unemployment remains near a half-century low and the stock market is near record highs."

"So what happened? Many people were relatively unscathed by the higher rates—for example, those who locked in low-rate mortgages before the Fed’s rate increase or own their homes outright. 

It’s also the case that U.S. politicians were much faster to act than in decades past to aid the economy. Several rounds of pandemic-related relief payments and other spending programs left many consumers and companies with extra cash, which fueled continued spending."

"a resilient stock market and bonds with higher yields have produced a positive “wealth effect” that encouraged consumers to spend rather than retrench."

"interest rates aren’t that high, historically speaking: They just feel that way because the U.S. went through an extended period of superlow rates."

"But some of those who predicted tough times say difficulties are still on their way. Gundlach recently predicted a recession this year and a drop to 3200 for the S&P 500, which closed Friday at about 5100."

"Rosenberg said gross domestic income, adjusted for inflation, has been flat over the past year, the job market is weaker than it appears and personal income isn’t keeping up with spending. In an interview, he said the economy’s troubles will be clear later this year."

Related post:

What are macro policy makers uncertain of? (2023) 

In addition to uncertainty about what the neutral interest rate is and what the the full-employment unemployment rate is, policy makers are not sure how long it takes for their changes to affect the economy (the lags).

This post has quotes from different policy makers on these issues that highlight the uncertainties.