ARI SHAPIRO, HOST:
As a new year begins, the U.S. economy is in far better shape than many people expected 12 months ago. Inflation has come down. Growth has held up. Employers added more than 2 1/2 million jobs last year, and the stock market will open tomorrow in near-record territory. That is a welcome surprise, given the widespread predictions last year that the U.S. would sink into a recession. We're going to look at how we dodged that bullet and what's ahead with NPR's Scott Horsley. Hey, Scott.
SCOTT HORSLEY, BYLINE: Hi, Ari.
SHAPIRO: In hindsight, 2023 turned out pretty well for the economy. What did forecasters get wrong?
HORSLEY: You know, a year ago, the Federal Reserve was pushing the brakes on the economy really hard in an effort to get inflation under control. The central bank raised interest rates very aggressively. And typically when the Fed does that, it does wind up triggering a recession. In fact, when business economists were surveyed a year ago, most thought a recession was more likely than not in 2023. Of course, that didn't happen. And today, most business forecasters think we're likely to avoid a recession this coming year as well. Austan Goolsbee, who heads the Federal Reserve Bank of Chicago, spoke not long ago about just how unlikely this turnaround has been.
AUSTAN GOOLSBEE: It's not just a soft landing. This would be the mother of all the soft landings. There's never been a drop in inflation of the magnitude we need to accomplish and which we're partway on without there being a big recession.
HORSLEY: Now, as Goolsbee notes, inflation is not yet totally tamed. Prices are still climbing faster than the Fed's 2% target. But inflation has come down a lot. And while higher interest rates have been a drag on some parts of the economy, especially the housing market, so far we have managed to avoid the kind of widespread economic turbulence that a lot of people were expecting.
SHAPIRO: Why is that? How did we avoid it?
HORSLEY: You know, there are two ways to combat inflation. You can tamp down demand, or you can boost supply. Higher interest rates are supposed to tamp down demand, and that is usually painful. But a lot of the inflation relief over the last year has actually come from increased supply as some of those pandemic-era supply hiccups were finally ironed out. Now, that took longer than people had expected early on, but with more goods flowing, that helped to keep a lid on prices, especially for stuff like used cars and appliances. More people also came off the sidelines and rejoined the workforce last year, and immigration rebounded. And what's more, workers have become more productive, and that's good because when workers can produce more for every hour they work, employers can pay them more without putting upward pressure on prices.
SHAPIRO: And does that necessarily mean smooth sailing for 2024?
HORSLEY: Not necessarily - you know, just as forecasters were overly pessimistic last year, we should probably be careful about putting on rose-colored glasses now. There is always a possibility that new storm clouds will take shape on the horizon. Getting inflation all the way down to 2% could prove more difficult than markets are currently betting. Austan Goolsbee says he and his Fed colleagues are going to tread carefully.
GOOLSBEE: If we are able to pull this off and get inflation down without a recession, we will - it will be studied for years. And if we fail, it will also be studied for years, OK? So we're going to aim not to fail.
HORSLEY: Some analysts think there's still more fallout to come from higher interest rates, especially now that a lot of people have spent the extra savings they piled up early in the pandemic and as much of the financial aid the federal government offered during that time has run out. Those are the risks we know about. And of course, there could also be unexpected twists and turns, like another war or a natural disaster or a sudden bank collapse. As Fed Chairman Jerome Powell said last year, economic forecasters are a humble lot with a lot to be humble about.
SHAPIRO: That's NPR's Scott Horsley. Thank you.
HORSLEY: And a qualified Happy New Year to you, Ari. Transcript provided by NPR, Copyright NPR.
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