Ever since the Federal Reserve began raising interest rates to fight inflation in March 2022, economists and Wall Street leaders warned that a U.S. recession was likely. Surging borrowing costs, sky-high consumer prices, and foreign wars combined to create a scary proposition for the economy.
By October 2022, with the year-over-year inflation rate still at 7.7%, more pessimistic minds had convinced their peers that an economic downturn was not only likely, but inevitable, with 100% of economists polled by Bloomberg forecasting a recession within 12 months.
But all the while, some experts made the case that a “soft landing”—where rising interest rates help quash inflation without sparking a job-killing recession—was still possible. Then, near the end of last year, after a string of surprisingly strong economic data, from cool inflation reports to robust retail sales numbers, the tide turned completely. Bloomberg’s December 2023 poll showed just 32% of economists forecasting a U.S. recession over the next 12 months.
And now, Thursday’s GDP report—which showed 3.3% growth in the fourth quarter, compared with Wall Street’s 2% forecast—has convinced some experts that the U.S. economy isn’t just headed for a soft landing, it’s already landed.
“To my surprise and delight we have landed softly,” Harvard economist Jason Furman wrote in a Thursday X post, adding that the “Fed deserves a lot of credit and should start cutting soon.”
Furman, who previously served as chair of the Council of Economic Advisers under President Barack Obama, explained that there are still “risks we veer off the runway into resurgent inflation or recession,” but they are “not unusually high.”
The comments represent a big shift in Furman’s outlook. The veteran economist argued in September 2022 that the Fed would need to be able to “tolerate” higher unemployment in order to tame inflation. And in December 2022, he warned that a soft landing was not the most likely outcome for the U.S. economy. Nodding to his change of heart Thursday, Furman admitted economists are often poor fortune tellers.
“I wish economists were better at forecasting recessions. But we’re not, and the last year was yet another painful reminder of that fact,” he wrote, adding that “recessions are like a roll of the dice, and if you get a 1 you get a recession.”
Another expectation-defying GDP report
Prediction prowess aside, Harvard’s Furman isn’t the only one celebrating the U.S. economy’s resilience. U.S. real gross domestic product rose at a 3.3% annualized rate in the fourth quarter, the Bureau of Economic Analysis reported Thursday. That was well ahead of Wall Street’s 2% forecast.
“The GDP release confirms the strings of previous data that support a successful soft landing thesis to the Fed’s battle against inflation,” Ashwin Alankar, head of global asset allocation at Janus Henderson Investors, told Fortune via email.
The Fed’s favorite inflation gauge, the personal consumption expenditures price index, also rose just 2.7% year over year in the fourth quarter, down from 5.9% during the same period a year ago. And the core figure, which excludes more volatile food and energy prices, jumped 3.2% year over year, compared with 5.1% during the same period a year ago.
The latest data means we’ve avoided “a second wave” of inflation, said Alankar. As long as the Fed doesn’t rapidly cut interest rates, it “will have successfully normalized prices and avoided choking the economy,” he said.
The latest GDP report also showed broad-based growth in the fourth quarter, with rising consumer spending, exports, government spending, and business investment. Put it all together, and, Jefferies senior economist Thomas Simons says, we’re on a “golden path.”
“Sustained growth and sustained disinflation is exactly what the Fed wants to see,” he wrote in a Thursday note. “This immaculate combination of trends in the data is remarkable and undeniable.”
