Mark your calendars. Unemployment fell to 3.6% in March 2022. Now it’s 3.7%. If it’s still relatively low in March 2025, and if inflation has fallen close to the Fed’s 2% target, then the US will have achieved its first ever soft landing. Three years of cyclically low unemployment without triggering high inflation is something that has frequently occurred in other countries (say the UK in the early 2000s), but never in the US. No one knows why.
America’s been around for a quarter of a millennium, which is a long time. The early years are not well documented, but I’m pretty sure that we’ve never had a soft landing since at least the Civil War. And yet it seems like Wall Street prognosticators are increasingly of the view that the US will soon achieve a soft landing, our first ever.
(One caveat is that the late 1940s are kind of an odd period, as the US had a technical recession after WWII, and yet the unemployment rate stayed pretty low. On the other hand, we had a significant inflation problem.)
I recently saw an interview with Claudia Sahm, where she suggested that’s it’s quite possible that the Sahm’s Rule will be violated during this cycle, which again would be unprecedented. I see these two potential outcomes as being related. Thus, suppose that unemployment rose just enough to trigger a Sahm’s Rule recession warning, with NGDP slowing just enough to bring down inflation, but not enough to trigger an actual recession.
In the US, unemployment rises by at least 2% in actual recessions. What if it merely rises to 4.2% by March 2025? That’s not a recession, but it would trigger a Sahm’s Rule warning.
How does one achieve a soft landing? Simple—just reduce NGDP growth to about 4%/year—forever. Will we do so? I have no idea. I fear that bringing inflation down will be more painful than many people now assume. I hope I’m wrong. (It’s the final percentage point that’s the toughest.)
PS. You may wonder why periods like the 1960s and 1990s were not soft landings. In the 1960s, inflation didn’t stay low once the labor market recovered. In the 1990s, the labor market didn’t fully recover until very late in the decade. March 2025 is now only 15 months away. It could be President Trump’s first great 2nd term success!!! (BTW, of the last eleven recessions, ten began under Republican presidents and one began under a Democratic president.)
PPS. Do you recall the many failed recession calls for 2023, such as Bloomberg’s famous “100% odds” forecast? Where did these failed forecasts come from? Probably at least in part from the fact that the US has never achieved a soft landing. If there was any question as to whether economists can predict the business cycle, then 2023 should have removed all doubt. Economists are utterly incapable of predicting the business cycle. Our track record is beyond abysmal. Please stop—don’t even try. Just set monetary policy so that markets expect 4% NGDP growth, level targeting.
PPPS. Back in August I started a post as follows:
I believe that the next 12 weeks will be critical for the Fed’s anti-inflation program. During that period, we’ll get three more jobs reports and the 3rd quarter NGDP report. Hopefully, we’ll see a bit further progress on wage inflation, which is the only sort of inflation that actually matters for macroeconomic stability. And I hope that NGDP growth continues its recent downward trend (to 4.7% in Q2).
But that’s not what I expect to happen. I expect that NGDP will accelerate in Q3, perhaps to 7% or 8%. That would be bad! And I expect 12-month nominal wage growth (average hourly earnings) to accelerate above the current 4.4% figure. I hope I’m wrong, but I fear that the Fed still hasn’t actually achieved a contractionary monetary policy stance.
The outcome surprised me. I was right about NGDP growth being too high in Q3 (albeit the slower NGDI data suggests it might be overstated), but wrong about nominal wage growth, which slowed to 4.0%. So I’m sort of neutral right now, waiting for further data to confirm where we are. Overall, the chances of a soft landing seem to be a bit better than I expected.
I visited China in October, and have a few comments for anyone planning a similar trip.
We flew China Airlines via Taipei, because the stupid US government restricts direct flights to China. My bags didn’t get beyond Taipei for 36 hours, so initially I just had the clothes on my back.
Each time I visit Beijing, the pollution seems less bad, although it’s hard to judge as it varies depending on the time of year. In general, the city looks more prosperous than in 2019 (my previous visit), but the pace of change has slowed from the early 2000s. The interiors of commercial buildings have improved much faster than the exteriors and sidewalk areas. The Chinese seem to put much more effort into the look of private spaces (say compared to Japan, where the outside areas are very well maintained.) Here’s a complex designed by the late Iraqi architect Hadid:
One of the biggest changes was the electrification of transport. Beijing was suddenly full of electric bikes and electric motor scooters. The city is far quieter than in 2019. Almost every Didi we took was electric (Didi is China’s Uber.)
I gave a number of talks while in Beijing, including two talks at the Central University of Finance and Economics, and also one at Tsinghua (often called the MIT of China.) I also gave a talk at the central bank, and was interviewed by Caixin, a business oriented media outlet.) I was also on a panel discussion at an IMF meeting. My message was to encourage China to steer away from fiscal stimulus, and instead rely on monetary policy.
In general, the Chinese students seemed far more eager to learn than students I’ve met in other places (including the US.) China was somewhat isolated during the Covid period, and there seems to be a real hunger to reconnect with the rest of the world. Compared to 2019, I saw far fewer westerners in Beijing, which is unfortunate.
We then left Beijing and traveled around China for ten days. Here are a few observations:
In most of the hotels, room service is done by robots. They look rather cute, although at first it’s a bit unnerving to stand next to a robot waiting to get into the elevator. But they are quite polite, allowing you to enter first. (Maybe they are Japanese robots.) Sorry, this video doesn’t show it move, as it was going to a different floor:
We took a high-speed train from Beijing to Xi’an, where we spent 4 days. In general, the high-speed network is a marvel of efficiency. The train stations have roughly 30 tracks, and they move vast numbers of people through the station each hour. Xian is a relatively pleasant university town with about 12 million people.
BTW, travel in China can be difficult if you are not part of a tour group, as things like admission to parks and museums can easily be sold out it you don’t purchase in advance. I benefited from having a wife that could but this stuff online—but it was even difficult for her, as blocks of tickets often sold out less than a minute after going on sale.
Among westerners, Xian is most famous for its army of terra cotta warriors. During the Tang Dynasty (i.e. the European Dark Ages), Xian (then called Chang’an) was the capital of China and the world’s largest city. The terra cotta army was only my third or fourth favorite sight in Xian. It is very impressive, but the crowds were so dense that it wasn’t as enjoyable as some other equally impressive sights. (If you wish to avoid the crush, there’s a nearby park with a Tang-era mausoleum that also has some warriors, and much smaller crowds.)
Even more enjoyable was the 14 km wall that surrounds the central city. At sunset you see lots of tourists (almost all Chinese), many of which are dressed in the traditional Tang Dynasty style (mostly women.) They rent the costumes and wigs in order to have their picture taken. The ancient city wall isn’t just extremely long, it’s huge—12 meters high and 12 meters wide.
My favorite sight was the area around Wild Goose Pagoda and especially the Tang Paradise park. If I tried to describe Tang Paradise it would sound like a schlocky Vegas attraction, but it’s actually a pretty stunning Tang dreamland.
(Imagine if instead of building the Venetian casino, Vegas had built an actual exact replica of the city of Venice. It would lack the historical “authenticity”, but it would still be a pretty amazing sight.)
Go to the park about an hour before sunset and stay until after dark. The views are dazzling. Then go back to the Wild Goose area if you like spectacular fountain light shows (I don’t.)
After visiting the terra cotta warriors, we stopped at Xi’an’s version of Beijing’s summer palace, which is well out into the suburbs. The grounds are pretty interesting, and in the evening there was a stunning outdoor stage show of a love story based on a Tang era poem. As China emerges from the austerity of the Mao era, the Chinese seem to gravitate toward extremely colorful and intricate light shows at night. In this park, they used lights to create the impression that an ancient hillside pagoda was floating in the sky.
We then took another high-speed train to Chongqing, a city of roughly 17 million. Along the way we passed though densely populated Sichuan province, which has a bit more rugged terrain than I expected, despite being extremely rich agricultural land. Chongqing’s geography is similar to Pittsburgh–the meeting of two rivers at a point of land—but it’s much hillier. We stayed in a hotel right at the point, with a design based on the Marina Sands in Singapore. (Not quite as nice, but far less expensive). Of all the cities in China, Chongqing is the one that most reminds me of Hong Kong. There are lots of skyscrapers clinging tightly to steep hillsides. Once again, there’s a very colorful light show along the river at night.
Some areas have almost a Blade Runner feel, like when the subway car goes out of the ground, into the air, and then shoots right through the middle of a high rise building (see video).
The streets in the central area are extremely crowded, more so than Beijing or Xian. My favorite parts included the walk along the river at night, and the old “mountain village”, also at night. Lots of things in China look better at night. But we did have an enjoyable afternoon at a bar high above the river, on a rare day of blue sky. You can get a wonderful meal at night at an outdoor restaurant overlooking the two rivers—at an extremely low price.
BTW, I saw a picture of a Borgesian book store in Chongqing, and decided to check it out. Don’t bother—it’s hard to find and looks less impressive than the pictures:
Then we took a low speed train to Zhangjiajie, in Hunan province. Even though it was daytime, we took a sleeper car, which is more comfortable.
In the West, Zhangjiajie is primarily known as the inspiration for the film Avatar. As is true of all the tourist sites we visited in China, it was extremely crowded. I’ve read that the economy is a bit weak in China, but with the reduction in international tourism, domestic tourism seems to be booming.
Compared to Western countries, the Chinese build much more impressive infrastructure in their parks. At one point we rode on roughly 15 escalators, one after another, carved inside tunnels in a steep mountain. Each was very long, the sort you might see in a London subway. They needed this because the extensive cable cars could not keep up with the volume of tourists. In the picture below, there are 999 steps leading up to the keyhole, which is larger than it looks. From there we took the 15 escalators to the top of the mountain, which is full of stuff like glass floored walkways hanging above vertical cliffs..
Back in Beijing, we saw a nice Matisse show at the 798 art district, one of my favorite parts of the city. Overall, however, the arts scene seems to have deteriorated in recent years, as the government seems to be emphasizing patriotic art over avant garde art. Four years ago, I saw one of my favorite contemporary art exhibitions at a museum across the street from 798. This time, the same museum showed a schlocky exhibition of recent Chinese landscape painting. In fairness, the crowds were 10 times higher for the bad art, so who am I to complain?
On previous visits to China, fashion seemed quite different from the West. Young women often wore frilly pastel colored outfits. On this trip the fashions seemed more similar to the West, with more women wearing dark colors like black.
When I go to China I always get a haircut. This time my usual place had closed down, but I found a cheaper place for $4.20. This Econlog post has more discussion of Chinese purchasing power. (TLDR—China is super inexpensive.)
On the way home, we stopped of for three days in Taiwan, which I described in a previous Econlog post. My favorite part of the trip was the old train we took in the northeastern part of the island. It reminded my of some very evocative scenes in films by Hou Hsiao-hsien, which show old trains creeping through green tunnels of vegetation. My wife confirmed that this was the train line used in those films. I suppose it won’t mean much to most people, but Hou Hsiao-hsien fans will know what I mean:
PS. I got a bad cold toward the end of the trip. People in Beijing told me it was probably the walking pneumonia that was going around. When I got home, I saw some slightly alarmist stories in the Western media about this outbreak. Here’s Bloomberg:
The rampant spread of mycoplasma has caused particular concern as many kids appear to not respond to azithromycin, which is commonly used to treat the infection. Among Chinese children, resistance to the antibiotic and others in the same class is more than 80%, the highest in the world, Yin Yudong, an infectious disease doctor at Chaoyang, told Beijing News earlier this month.
I’m not sure if this is what I had, but I can confirm that azithromycin didn’t work for me.
It’s not hard to figure out what went wrong with the Fed’s FAIT policy initiative of 2020. Right after adopting a policy containing the phrase “average inflation targeting”, the Fed allowed the average inflation rate to diverge sharply from the roughly 2% average we saw during the period of 1991-2020. They adopted an asymmetric policy of making up for inflation shortfalls, but not inflation overshoots. The result was predictable, and will likely cost Biden another term in the White House.
Former Chicago Fed president Charles Evans has a new paper that discusses what went wrong and how to fix it. In the end, he sees the Fed’s FAIT regime as being relatively sound, and views the recent monetary policy mistakes as being relatively modest. In my view, the policy tweaks he proposes would not be enough to fix the underlying problem. The Fed needs to take a more radical step, either make FAIT fully symmetrical, or (even better) switch to something like NGDP level targeting.
Evans does acknowledge that there was excess demand stimulus in 2021, but in my view he understates the just how far policy went off track. Much of the paper focuses on how supply problems contributed to high inflation in 2021 and 2022, a problem that turned out to be largely transitory.
If you take the longer view, it begins to look like the real problem was nominal—excessive growth in NGDP. Evans suggests that the trend rate of growth in real GDP is about 1.8%. That suggests that NGDP should grow at roughly 3.8% over the long run. Here are the actual growth rates over the past 4 years:
Real GDP, 2019:Q3 to 2023:Q3: 2.0%
Nominal GDP, 2019:Q3 to 2023:Q3: 6.2%
Thus essentially all of the excess inflation (for the GDP deflator) was due to excessive growth in demand, at least in an accounting sense. NGDP growth was 2.4%/year above the level required to hit the inflation target, a total overshoot of roughly 10% over 4 years. That NGDP overshoot is roughly comparable to the inflation overshoot over the past 4 years. Indeed, it’s surprising that inflation was not even worse, as the PCE index has averaged about 4% inflation over the past 4 years, a bit below the figure you might expect from NGDP overshoot. If in 2019 you had been told that we’d have 6.2% NGDP growth, no Covid, and no Ukraine War, what sort of PCE inflation rate would you have expected? Be specific.
In fairness, the excessive growth in demand may have caused RGDP to slightly overshoot trend growth. Slower NGDP growth would have shown up as both slower RGDP growth and slower inflation. But as long as NGDP growth stayed close to 4%/year trend line, I would have expected RGDP to return fairly close to its natural rate, once Covid was over.
More importantly, I think a lot of inflation targeting advocates overlook the fact that a level targeting approach makes a severe inflation overshoot much less likely to occur in the first place. There’s far too much discussion of whether the Fed should have begun raising rates at this meeting or that meeting, and not enough discussion of what sort of monetary regime would create stabilizing speculation in the financial markets.
With a 4% NGDPLT policy, market interest rates on Treasury securities would have risen sharply in late 2021, as participants saw that NGDP was likely to overshoot the trend line and require subsequent contractionary policy. That rise in rates would have made the NGDP overshoot much smaller in the first place. And as long as NGDP is on track, any inflation overshoots due to supply side factors really will be “transitory”.
Based on what I’ve been reading from various Fed officials, I believe the Fed will fail to incorporate this perspective in its upcoming 5-year review, and hence will fail to come up with the sort of policy regime that would prevent a repeat of the mistakes of 2008-09, or the mistakes of 2021-22.
HT: David Beckworth
Update: I recently did a podcast with Dan Schulz, discussing everything from art to economics. Here are some links:
Recall my recent post where I argued that Japan’s economic performance has been somewhat disappointing. If we used nominal figures, we’d conclude that it’s been an unmitigated disaster. In 1995, Japan’s per capita nominal GDP was more than 50% higher than that of the US ($44,198 vs. $28,658. Now it’s well below half the US level. I’m not saying that doesn’t matter at all (it may explain the decline in Japanese tourism), but surely it’s not an adequate measure of Japan’s overall position relative to the US.
I’ve been to all of these places in recent years, and for the most part the PPP figures seem to be in the right ballpark. But there’s one exception. Taiwan’s PPP adjustment seems way too large.
I’m not trying to dump on Taiwan. Over at Econlog I recently praised Taiwan, which certainly has a highly successful economy. But Taiwan doesn’t seem even close to Austria in living standards. More like Japan (at best.)
Taken at face value, the IMF is claiming that Taiwan has a far lower price level than mainland China. I recently spent three weeks in China, and then stopped in Taiwan for three days on the way home. My initial reaction was that Taiwan seemed far more expensive than the mainland (albeit considerably cheaper than the US.) An hour long taxi ride to the Beijing airport costs about $15, whereas the roughly equal ride from the Taiwan airport to our hotel was about $45. Food was also more expensive in Taipei. My wife bought the same meat filled pancake that cost 80 cents in Beijing for $2 in Taipei.
Those are just anecdotes, but service prices tend to reflect wages, and wages are obviously much higher in Taiwan than in Mainland China. I can’t even imagine which goods are so cheap in Taiwan that they could explain the IMF finding the overall Taiwanese cost of living to be far lower than the mainland. Manufactured goods like cars are also really inexpensive in China. What am I missing?
In contrast, China’s upward adjustment might be a bit too small. China seemed far cheaper than all of the other countries on the list.
So PPP adjustments are far from perfect. Even so, using nominal GDP/person figures leads to nonsense, like the claim that Japan is in the midst of a Great Depression.
After stagnating under Mao Zedong in the 1960s and 70s, China opened to the world in the 1980s — and took off in subsequent decades. Its share of the global economy rose nearly tenfold from below 2 per cent in 1990 to 18.4 per cent in 2021. No nation had ever risen so far, so fast.
Then the reversal began. In 2022, China’s share of the world economy shrank a bit. This year it will shrink more significantly, to 17 per cent. That two-year drop of 1.4 per cent is the largest since the 1960s.
These numbers are in “nominal” dollar terms — unadjusted for inflation — the measure that most accurately captures a nation’s relative economic strength.
Define “economic strength”. BTW, that’s a clumsy way to define nominal share of global economy. Instead of saying “unadjusted for inflation”, the FT should have said “at current exchange rates.”
PS. If I had no access to the IMF data and was told the US GDP/person was $80,000, I would have guessed (PPP adjusted) $75,000 for Austria, $60,000 for Japan, $55,000 for Taiwan, $30,000 for Chile and $26,000 for China. So Taiwan is the one where I’d be way off.
PPS. Yes, RGDP doesn’t exactly equate to living standards (which reflect consumption), but Taiwanese investment is 25.9% of GDP, only slightly above the 24.2% ratio in Austria. A slightly higher investment ratio cannot explain the size of the anomaly. Taiwan’s PPP adjustment is too large.
Welcome to a new blog on the endlessly perplexing problem of monetary policy. You’ll quickly notice that I am not a natural blogger, yet I feel compelled by recent events to give it a shot. Read more...
My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.
"Thanks for the pictures and travelogue. Really appreciate your travel posts. One question: did you find the service better in Taiwan than China? In my experience, I found the service..."
