It will probably take years for a reliable consensus to develop around why the economics profession and central bankers were so far off when it came to the economy’s growth last year. But because our answers to the question may affect
future monetary policy actions
and how we look at our economic prospects, it is important to start the investigation immediately.
At the heart of most forecasts for a downturn was the expectation that the rate hikes that had already occurred in 2022 would weigh on the economy in the following year. What’s more, the Fed was expected to hike a few more times in 2023. The Fed describes the state of monetary policy as
“restrictive
,
“
meaning it restricts economic activity. People who worried that the Fed may have gone too far called them
“punitive
.
“
Looking at the growth of 2023, however, it is hard to see what might have been restricted. The
unemployment rate
in December of 2022 was 3.5 percent. Today, it is 3.7 percent, an almost insignificant climb. The average unemployment rate in 2023 was 3.6 percent—exactly the average in 2022. Businesses and governments—federal, state, and local—
kept on adding workers throughout 2023
, and layoffs remained extremely low.
The Fed’s median projection at the end of 2022 was for unemployment to rise to 4.6 percent by the end of last year. The range of projections for unemployment ran from four percent to 5.4 percent. Which means that actual unemployment is
lower than even the most bullish members of the Fed foresaw
.