Why So Many People Got This Year's Economy Wrong

Tracy Alloway (0:09)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, it's nearly the end of 2023 It's been a wild ride.

Joe Weisenthal (0:20)

What an incredible year. I mean, the stat that just like jumps out to me is 41.24%. As of right now, we're recording this December 14th. That is the annual gain of the NASDAQ. 3.1% on the S&P, mortgage rates below 7%.

Good times. It looks like good times when I look at the screen.

Tracy Alloway (0:44)

Even though you're talking about the rally, it sounds like you haven't escaped the year unscathed because of your voice. It sounds like you've had a rough 2023

Joe Weisenthal (0:51)

It's been a good 2023, but my voice is not in great shape at this moment.

Tracy Alloway (0:56)

Joe was singing last night at his first show.

Joe Weisenthal (0:59)

Yes, that is my excuse that I was out late at a bar singing country music, but here I am. And I'm very excited to talk about the bizarre, weird, unexpected year that 2023 was.

Tracy Alloway (1:11)

Yes. So if you recall this time last year in 2022, it seemed like the consensus going into the year was we were going to have a recession. People were talking about a hard landing, this idea that the Fed was going to have to keep hiking rates, and that that was eventually going to have to bring down employment, and we were going to see a slowdown in the economy. And yet, here we are, and it hasn't materialized.

Joe Weisenthal (1:36)

This time last year, there was just so much pessimism, and the market was really in a rough shape in November, December last year. There was this view, it's like, you know what? Things are in rough shape, but it doesn't matter. Inflation is still so high, the Fed has to keep pressing, the Fed has to keep hiking. Yeah, it was pretty grim, and then somehow, this is the big thing that I think people are going to be talking about for years, which is how did we have like the biggest rate hike cycle ever, or one of them, without more slowing in the economic activity?

And how did inflation come down from where it was at its peak in the middle of 2022 without more weakening in the labor market?

Tracy Alloway (2:18)

Yes, and I should note, it wasn't just economists and analysts who were very pessimistic on the economy going into 2023 We had a lot of real-world people, for lack of a better term, who also thought that things were going to slow down. For instance, you had, I think, the Conference Board survey of CEOs, like almost 100% were predicting a recession in the US. All the sentiment surveys, as we've been discussing on the show, have been coming up until recently. We're coming in very negative. So this wasn't just an economist problem.

But I think we should go over the year and we should review what exactly happened that surprised a lot of people.

Joe Weisenthal (3:00)

Well, you said this, I think, in our recent episode that we did with Jan Hatzias. And I totally agree. I mean, I feel like the last few years will be one of these periods in economics that people are going to be writing Ph.D. papers on for 50 years, right? Kind of like the Great Depression or other periods that are these sort of Holy Grails or Rosetta Stones for understanding how the economy works. There's going to be so much debate and work and academic research and relitigating debates, et cetera, about like what happened over the last four years.

Tracy Alloway (3:31)

I really hope we still have Odd Lots in 2073 And we'll just do episodes on like what happened.

Joe Weisenthal (3:37)

My voice will sound better then.

Tracy Alloway (3:41)

All right. Why don't we just get to it? We are going to be speaking with Anna Wong. She is the chief US economist for Bloomberg Economics. It's the first time we've ever had her on the show, which is kind of surprising.

Anna, thank you so much for coming on Odd Lots.

Anna Wong (3:55)

Happy to be here, Tracy.

Tracy Alloway (3:57)

So this time last year, why don't you walk us through what exactly Bloomberg Economics was expecting? How did you expect this particular year to turn out?

Anna Wong (4:08)

So a year ago, or even more like a year and a half ago, we first put out our recession model because at the time, the Fed started hiking rates, and there was just a lot of curiosity about how this would end. And our goal, then, was to have a more precise timing of the probability of recession as opposed to just giving a vague what is the 12th month ahead recession. And there's a cottage industry of these models out there. And so our model was to put out some kind of numbers on each month, probability in July, August.