There seems to be an increasingly widely held view that the US is about to slide into recession. One piece of evidence is the inversion of the yield curve.

Freepik

And yet, the level of fed funds futures is still pretty high in early 2024, around 3% to 4%. That’s much higher than during 2019, which was a boom year. Indeed, that suggests a soft landing. So what’s going on? I’m not sure, but here’s one hypothesis worth considering:

Let’s suppose that I’m correct in my claim that the US economy is wildly overheated. In that case, we might observe a recession in growth rate terms and yet a relatively strong economy in terms of levels.

I recall a recent set of posts by George Selgin that showed how the US economy was pretty strong in the years after 1945, despite a big drop in measured GDP from the overheated levels of WWII. Obviously we aren’t as overheated as during that war (when unemployment fell to barely above 1%), but our labor market is more overheated than during any period I can recall. I continue to run into service firms that cannot meet demand because they simply cannot find the workers.

I realize that this is an optimistic scenario and there are plenty of reasons to be pessimistic. Here are two examples:

Reducing inflation is often painful.

Biden’s economic policies are pretty inefficient.

Nonetheless, the level of interest rate futures for 2024 still leaves me a glimmer of hope that we might get a softish landing—not so much in terms of RGDP growth (which will likely be poor), but in terms of the labor market.

(I don’t like to forecast either asset prices or the business cycle. But consider “labor market better than RGDP” to be my conditional forecast for 2023-24. BTW, that also describes 2022.)

PS. People keep asking me about AI. I do believe that at some point it will boost growth. But recall that it took about 40 years to go from the early IBM computers in the 1950s to the tech productivity spurt of 1995-2004. And even that lasted only a decade. I’ll believe it when I see trend RGDP moving back above 2%.

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