I don’t do unconditional forecasts

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.



16 Responses to “I don’t do unconditional forecasts”

  1. Gravatar of steve steve
    16. December 2022 at 06:11

    Sounds better than expected but too many external inputs to sort yet. Russias war on Ukraine and China sorting out its policies on covid just to name two. Also, any forecasts for your Bucks. I thought it was pretty positive for them but they got killed last night.


  2. Gravatar of ssumner ssumner
    16. December 2022 at 08:37

    I started the year predicting they were number 2 to the Celtics in the East, and that’s still my view. They are still a title contender, but as with all NBA teams they need some things to break in the right way.

  3. Gravatar of TF TF
    16. December 2022 at 11:55

    I agree with this forecast completely. I may be thinking of another economist, but I thought you were in the “like landing a 747 on aircraft carrier” camp regarding a soft landing. I don’t understand why everyone thinks a soft landing is impossible, personally I think we are basically there now. Breakevens are fine, employment is fine, Fed will be hiking drastically slower, maybe two small hikes and they will have 6 months of good inflation data.

  4. Gravatar of David S David S
    16. December 2022 at 18:05

    I agree with this forecast conditionally. If the Fed is indeed “targeting the forecast” then we finally might be making progress. Granted, they should be targeting an NGDP level, but they might be saving that for when Scott retires unconditionally.

    I get annoyed when people in popular media sources say something along the lines of the Fed “having to thread a needle” to imply that they face a nigh impossible task of a soft landing. Threading a needle just requires focus on the right goals and making course corrections as necessary.

  5. Gravatar of foosion foosion
    17. December 2022 at 08:12

    Scott, I wonder what’s your take on this from Brad DeLong:

    “The optimal monetary policy strategy coming out of the plague [includes]: (1) delay raising interest rates until inflation was high enough to grease a rapid reopening recovery of and shift in economic activity into its new post-plague full-employment sectoral-balance configuration.”

  6. Gravatar of ssumner ssumner
    17. December 2022 at 09:11

    TF, I may have used the 747 analogy (I don’t recall), but I’ve always thought a soft landing was possible.

    If I used that analogy, it was unwise hyperbole.

    Foosion. I disagree. The optimal policy ignores inflation and does NGDP level targeting.

  7. Gravatar of Spencer Spencer
    17. December 2022 at 09:37

    re: “The optimal policy ignores inflation and does NGDP level targeting.”

    Yeah, that’s about all those dunderheads at the FED can deal with. I.e., ignore rates, ignore employment, ignore the extraneous.

    Economists flunked accounting. Savings is not synonymous with the money supply.

    You can probably identify the inflection points using a different, shorter, rate-of-change. While the fundamental’s precede the technical’s, technical analysis has become more accurate since the FED discontinued legal reserves.

  8. Gravatar of Spencer Spencer
    17. December 2022 at 09:44

    Contrary to popular belief, aka, George Selgin:

    “None of this would matter if the Fed acted as an efficient savings-investment intermediary, as commercial banks are able to do, at least in principle.” And: “This is nonsense, Spencer. It amounts to saying that there is no such things as ‘financial intermediation,’ for what you claim never happens is precisely what that expression refers to.”

    “Yes, I hold that commercial banks are credit intermediaries and not just credit creators” — George Selgin

    Don’t conflate an individual bank’s operations with the operations of the system. The increased lending capacity of the financial intermediaries is comparable to the increased credit creating capacity of the commercial banks in only one instance; namely, the situation involving a single bank which has received a primary deposit.

    But this comparison is superficial since any expansion of credit by a commercial bank enlarges the money supply, whereas any extension of credit by an intermediary simply transfers the ownership of existing money.

  9. Gravatar of foosion foosion
    17. December 2022 at 18:29

    Scott, I figured you’d disagree in general. However, if we’re in a situation where the economy needs some structural changes that are made easier with temporarily higher inflation (and NGDP), then it might make sense to move off NGDP level targeting to facilitate the transition, then move quickly back to the usual optimal policy.

    If you’re interested, DeLong’s full post is at https://braddelong.substack.com/p/contra-vince-reinhart-the-fed-has

  10. Gravatar of ssumner ssumner
    18. December 2022 at 05:55

    Foosion, I don’t believe we needed excess NGDP growth to facilitate the transition. If the labor markets were normal, there might be a case to be made. But with the labor markets almost absurdly overheated, I don’t see how anyone can argue the excess NGDP growth was needed. Needed for what?

    And why does he think things are fine, when both forecasters and inverted yield curves are pointing to the strong possibility of recession?

  11. Gravatar of Trying to Learn Trying to Learn
    18. December 2022 at 16:50

    Hey Scott, when you say “Yeah!” for 0.5% RGDP growth, is that in relation to the 1.2% forecast? Or only because you think it’s unlikely we even get up to 0.5? Is there any reason we’d ever want lower RGDP, all else equal?

    Also, why should the Fed target 4% NGDP growth? Aren’t we overshooting, meaning for 4% level targeting we need <4% NGDP growth to get back to trend?

  12. Gravatar of Rodrigo Rodrigo
    18. December 2022 at 17:46


    Markets is pricing in rate cuts next year, breakevens falling while wages keep increasing. It looks to me the market has been either too optimistic inflation would roll over or pricing in the fed will over do it. Or is it that the market believes Powell will actually do whatever it takes, but that fed tightening actually permeating through to wage growth means there is much pain still to come even if not a recession? Very confused as market has not been keen on pricing in a long period of inflation (fed fund futures, breakevens, falling mid and long term rates all point lower) as one would think from stubbornly high wage inflation.

    Trying to figure how you interpret these factors (or don’t) in your prediction of a soft landing.

  13. Gravatar of ssumner ssumner
    19. December 2022 at 08:48

    Trying, Obviously more RGDP is better, other things equal. I meant that if we get the NGDP growth I favor (say about 4%), then I’d expect roughly 0.5% RGDP growth.

    Of course 1.2% is higher other things equal, but if we get 1.2% next year, I expect NGDP growth would be too high. So other things would not be equal. But 4% NGDP and 1.2% RGDP? Double “yeah”.

    Rodrigo, It may be a case where the markets are averaging out several different scenarios, including stubbornly high inflation and a hard landing.

  14. Gravatar of Stephen Stephen
    19. December 2022 at 22:20


    Long time reader – like the content you write, but still don’t always fully grasp what you write. I want to understand better what you recommend the fed do vs what it currently does. You’ve been a long time proponenat of NGDP PLT.

    What do the mechanics of that look like compared to what the fed does today? For example, the fed closely watches the CPI / PCE data, unemployement, jobs report, JOLTS data, which all comes out weekly or monthly. What data would you follow to meet NGDP expectations as it’s my understanding that NGDP data would lag much more than any CPI / jobs / jolts data?

    The reason I ask is I remember in Dec, Jan, Feb you thought the economy was running hot, but it didn’t become clear to you, and I think everyone else in April / May timeframe that the fed really needed to get inflation down.

    I appreciate the comparison between a scott fed and jpow 🙂

  15. Gravatar of ssumner ssumner
    30. December 2022 at 10:10

    Stephen, It was clear by late 2021 that NGDP growth was excessive. Even the Fed knew this, according to report sI’ve seen. So I would have adopted a tighter monetary policy to keep NGDP growth along a trend line of no more than 4%, or perhaps even 3.5%.

    The key is to do level targeting, the exact rate is less important.

  16. Gravatar of TheMoneyIllusion » The AD surge is 100% monetary policy TheMoneyIllusion » The AD surge is 100% monetary policy
    16. June 2023 at 05:00

    […] I’m almost ready to take a victory lap on this post from late 2022, where I expressed skepticism about the Fed’s forecast that the unemployment […]

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