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In any case, I find conditional forecasts to be far more interesting.

This tweet caught my eye:

Yikes? I say “yeah!”. I’d be thrilled with 0.5% RGDP growth in 2023. That would probably represent something close to a soft landing, particularly if overall NGDP growth were around 4% (as implicitly forecast by the Fed.)

Keep in mind that the Fed is also forecasting 0.5% RGDP growth in 2022, and with most of the data already in we are likely to come very close to that figure (because these are Q4 over Q4 figures.) And that likely 0.5% RGDP growth was accompanied by extremely low unemployment, indeed the most overheated job market in my entire life.

Of course, we would not necessarily get the same result in 2023, and along with its 0.5% RGDP forecast the Fed forecasts unemployment rising to 4.6%. I disagree.

So here’s my conditional forecast. I don’t know what RGDP growth will look like, but I predict the labor market will do much better than predicted by Okun’s Law. Thus if we do get 0.5% RGDP growth, I predict unemployment will only edge up to about 4.0% (not 4.6%), which is not a recession by any reasonable definition.

The bad news is that RGDP might do much worse than 0.5%, in which case unemployment would rise sharply. But given the overheated nature of the current job market, with severe worker shortages in many industries, I’m predicting that 0.5% RGDP growth would be associated with a pretty decent job market.

If we get 0.5% RGDP growth and 4.0% NGDP growth then that’s basically a soft landing and the Fed should celebrate. The Fed may blow it, but at least they are smart enough to target the correct forecast.

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