Economists predicted a recession. So far they have been wrong.

The recession America expected never occurred.

Many economists have predicted a painful downturn in early 2023, a view so widely supported that some commentators have begun to think treat it as a given. Inflation had risen to its highest level in decades, and some forecasters believed this was due to a drop in demand a long-term increase in unemployment to wrestle it down.

Instead, the economy grew 3.1 percent last year, up from less than 1 percent in 2022 and faster than the average in the five years before the pandemic. Inflation has fallen significantly. Unemployment remains at historic lows and consumers continue to spend even as Federal Reserve interest rates are at a 22-year high.

The gap between doomsday predictions and the reality of the heyday is forcing a reckoning on Wall Street and in academia. Why have economists made so many mistakes, and what can policymakers learn from those mistakes as they try to anticipate what might happen next?

It is still too early to draw firm conclusions. The economy could still slow if the Fed raises its two-year interest rate. But what is clear is that old models of the relationship between growth and inflation have not served as accurate guidance. Bad luck was behind the initial burst of inflation, more than some economists appreciated. Good luck has helped the weather subside, and there have been more surprises along the way.

“It's not like we understood macroeconomics perfectly before, and this was a pretty unique time,” said Jason Furman, a Harvard economist and former Obama administration economic official who thought lowering inflation would require higher unemployment. “Economists can learn a huge, healthy dose of humility.”

Economists, of course, have a long history of getting their predictions wrong. Few saw the global financial crisis coming earlier this century, even as the mortgage crisis that caused it was already in full swing.

Yet the recent misses were particularly significant. First, many economists dismissed the possibility of rapid inflation. When prices went up, Fed economists and professional forecasters generally expected at least a short period of contraction and a rise in unemployment. Neither has been realized yet.

“It was always going to be difficult to predict what an economy would look like emerging from a largely unprecedented pandemic,” said Matthew Luzzetti, chief economist at Deutsche Bank, whose team's recession forecast last year proved too pessimistic.

Not all economists expected a recession last year. Some rightly expected inflation to fall as the pandemic's disruptions faded. But even most of them were surprised by how little damage the Fed's rate hike campaign appears to have done.

“The unemployment rate hasn't even risen since the Fed started tightening,” said Alan S. Blinder, a Princeton economist who served as Fed vice chairman during the last successful soft landing and was a prominent voice arguing that another landing was possible. . “I don't know how many people expected that. I know I didn't do that.”

The series of forecast errors started in early 2021.

At the time, a handful of prominent economists, including Harvard's Lawrence H. Summers, a former Treasury secretary, began warning that America could experience an inflation pop as the newly elected Biden administration pushed through a large stimulus package — including one-time checks and state and local aid – on top of the Trump administration's previous corona aid. They feared the money would increase demand so much that it would drive up prices.

Many government officials and economists vociferously doubted that inflation would rise, but the price increase came. Some of it was about demand, and some of it was due to bad luck and pandemic disruptions.

Stimulus money and lifestyle changes related to the pandemic had helped fuel shopping for goods at a time when the supply chains set up to deliver those products were under strain. Shipping lanes were unprepared for the flood of demand for couches and fitness equipment. At the same time, manufacturers faced rolling closures due to virus outbreaks.

Russia's invasion of Ukraine in 2022 has further fueled price increases by disrupting global food and fuel supplies.

By that summer, the U.S. consumer price index peaked at an annual increase of 9.1 percent and the Fed began to respond in a way that made economists think a recession was imminent.

Fed policymakers began what quickly became a rapid series of rate hikes in March 2022. The goal was to make it significantly more expensive to buy a house or car or expand a business, which would in turn slow the economy, depress consumer demand and force companies to stop raising prices so much the prices.

Such dramatic interest rate adjustments, intended to cool inflation, have typically led to recessions, so forecasters began predicting a downturn.

“History has shown that these two things usually add up to a recession,” said Beth Ann Bovino, chief economist at US Bank, referring to the combination of high inflation and interest rate hikes.

But the economy — while challenging for some families, between high prices and expensive mortgages — has never fallen off that cliff. Recruitment gradually slowed. Consumer spending cooled, but in fits and starts and never dramatically. Even the interest-rate-sensitive housing market calmed down without refueling.

Robust government support helps explain some of the resilience. Households were flush with savings accumulated during the pandemic, and state and local authorities were slow to spend their own pandemic money.

At the same time, a strong labor market helped boost wages, allowing many households to weather price increases without having to cut back much. Years of ultra-low interest rates had also given households and businesses the opportunity to refinance their debts, making them less susceptible to the Fed's campaign.

And part of the continued strength was due to the fact that, with inflation cooling, Fed officials were able to pull back before they crushed the economy. They halted interest rate hikes after July 2023, leaving them at a range of 5.25 to 5.5 percent.

That raises a question: Why has inflation cooled even as the Fed stopped cutting growth?

Many economists had previously thought that a sharper slowdown was likely necessary to completely eradicate rapid inflation. Mr. Summers, for example, predicted that It would take years of unemployment above 5 percent to get price increases back under control.

“I believed that soft landings” were “the triumph of hope over experience,” Mr. Summers said. “This seems like a case where hope has triumphed over experience.”

He pointed to several factors behind the surprise, including supply issues that have subsided more than he expected.

Much of the disinflation came from a reversal of previous setbacks. Gas prices fell in 2023, and those softer prices trickled down to other industries. Healing supply chains have allowed good prices to stop rising as quickly and in some cases even fall.

And there was some economic cooling. Although unemployment remained relatively stable, the labor market was rebalancing in other ways: it indeed was about two vacancies for every available worker in 2022. That's now down to just 1.4, and wage growth has cooled as employers compete less fiercely to hire.

But this adjustment in the labor market was milder than many had expected. Prominent economists had doubted it would be possible to cool conditions by eliminating vacancies without also causing a spike in unemployment.

“I would have thought it was an iron law that disinflation is painful,” says Laurence M. Ball, a Johns Hopkins economist and author of a influential article from 2022 who argued that reducing inflation would likely require a rise in unemployment. “The overall lesson, which we never seem to quite learn, is that it is very difficult to predict things and we should not be too confident, especially when a very strange, historic event like Covid happens.”

The question now is what that means for the coming months. Can economists be misled again? They expect moderating inflation this year, continued growth and several interest rate cuts by the Fed.

“We landed softly; we just have to get to the gate,” Mr. Furman said.

Fed officials could provide insight into their own thinking at their meeting next week, which concludes on Jan. 31. Investors expect policymakers to keep rates steady, but will look to a news conference with Federal Reserve Chairman Jerome H. Powell for any hint on this. the future.