Two views

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.

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%.



27 Responses to “Two views”

  1. Gravatar of Bobster Bobster
    26. March 2023 at 18:50


    Lars is arguing monetary policy is already too tight.

    What do you think about his argument? He seems to disagree with you on lags

  2. Gravatar of ssumner ssumner
    26. March 2023 at 21:26

    Bobster, I agree that we should target NGDP at around 4%, but I don’t see M2 having much predictive value.

  3. Gravatar of postkey postkey
    27. March 2023 at 00:38

    “ . . . then there’s this one there’s the
    18:56 leading economic indicators here’s the conference board top 10 leading economic indicator index and
    19:03 this is a 100% hit rate on anticipating recessions when it goes negative and as you can see here right on the right side
    19:10 of the chart uh circled in red you know we’re down at levels that so far in this
    19:16 data series which goes back to the at least the early 70s not the 60s
    19:21 um is coincident with recessions . . . “ ?

  4. Gravatar of postkey postkey
    27. March 2023 at 00:44

    “at some point it will boost growth.”
    Ignorance is bliss?
    No ‘BAU’?
    ‘Most’ ‘economic thinking’ is ‘short run’ and ‘redundant’? ‘It’ ignores the ‘supply side’?
    ‘Growth’ {and ‘civilisation’} depends upon ‘cheap’ F.F. – those so called ‘halcyon days’ are ‘over’. ?
    “The crisis now unfolding, however, is entirely different to the 1970s in one crucial respect… The 1970s crisis was largely artificial. When all is said and done, the oil shock was nothing more than the emerging OPEC cartel asserting its newfound leverage following the peak of continental US oil production. There was no shortage of oil any more than the three-day-week had been caused by coal shortages. What they did, perhaps, give us a glimpse of was what might happen in the event that our economies depleted our fossil fuel reserves before we had found a more versatile and energy-dense alternative. . . . That system has been on the life-support of quantitative easing and near zero interest rates ever since. Indeed, so perilous a state has the system been in since 2008, it was essential that the people who claim to be our leaders avoid doing anything so foolish as to lockdown the economy or launch an undeclared economic war on one of the world’s biggest commodity exporters . . .
    And this is why the crisis we are beginning to experience will make the 1970s look like a golden age of peace and tranquility. . . . The sad reality though, is that our leaders – at least within the western empire – have bought into a vision of the future which cannot work without some new and yet-to-be-discovered high-density energy source (which rules out all of the so-called green technologies whose main purpose is to concentrate relatively weak and diffuse energy sources). . . . Even as we struggle to reimagine the 1970s in an attempt to understand the current situation, the only people on Earth today who can even begin to imagine the economic and social horrors that await western populations are the survivors of the 1980s famine in Ethiopia, the hyperinflation in 1990s Zimbabwe, or, ironically, the Russians who survived the collapse of the Soviet Union.”
    “It is this belief in a new digital revolution which gave rise to the much-derided article by Danish politician, Ida Auken – originally titled “Welcome to 2030: I own nothing, I have no privacy, and life has never been better.”  More popularly known as “you’ll own nothing and you’ll be happy.”  It is a world of digital currencies and digital IDs, vaccine passports and 15-minute cities, electrification and driverless cars.  All of it based around the “energy too cheap to meter” from wind turbines and solar panels, and all of it operated by autonomous artificial intelligence within the “singularity” of the “internet of things.”
    It is a mirage, of course… one only visible to so-called “virtuals” – people whose lives and careers are now so detached from the material world that, were there not so many of them, could otherwise be diagnosed as certifiably insane.  The real world, meanwhile, looks more akin to the second global collapse – the first being the collapse of the integrated economies of the Bronze Age Eastern Mediterranean empires sometime around 1186 BCE.  The majority of ordinary people have seen their living standards decline over the past two decades – a process compounded and accelerated by two years of lockdowns followed by a year of self-destructive sanctions on key resources.”?

    Are you ‘certifiably insane’? 

  5. Gravatar of William Peden William Peden
    27. March 2023 at 07:11


    I agree on M2, since it’s a simple sum aggregate and performed back in e.g. the early 1990s, and to a lesser extent the early 1980s/2007-2010.

    However, the Divisia aggregates, which signalled moderation in the early 1990s, recession in the early 1980s, and at least didn’t signal inflation in 2007-2010, are now also signalling tight monetary conditions:

    It’s true that there was a big real balance overhang from 2020-2021, but that seems to have been used up by now. CPI inflation is likely to fall over the next few months, as the March-June 2022 surge drops out of the stats; annualised monthly inflation has been relatively moderate for a while now:

  6. Gravatar of Spencer Spencer
    27. March 2023 at 08:05

    Of course, M2 is mud pie.

    But Barnett now confuses assets with liabilities. And his ‘USER DEMAND INDEX’ ignores Vt.

    And Barnett doesn’t understand the distributed lag effect of money flows.

    Example: “as the March-June 2022 surge drops out of the stats”

    Unless Vt crashes, 2% inflation is a long way off. Money flows are historically high.

    The correct way to fight inflation is to drain reserves while lowering policy rates. I.e., the 1966 Interest Rate Adjustment Act is apropos.

  7. Gravatar of Spencer Spencer
    27. March 2023 at 08:18

    Barnett brags about being more accurate in his prediction for inflation than Friedman in 1983. But Barnett’s divisia aggregates completely missed the 19.2% roc in N-gNp in the 1st qtr. of 1981.

    Money should be defined exclusively in terms of its means-of-payment attributes.

    The present array of interest-bearing checking accounts has confused the distinction between means-of-payment accounts, and saving-investment accounts, and created a dilemma as to what portion, if any, of these interest-bearing accounts should be considered as savings.

    This dilemma is resolved when the transactions velocity of demand deposits is taken into account; i.e., deposit classifications are analyzed in terms of monetary flows. Obviously, no money supply figure standing alone is adequate as a “guidepost” to monetary policy.

    Scientific evidence “is proof, which serves to either support or counter a scientific theory or hypothesis. Such evidence is expected to be empirical evidence and in accordance with scientific method” – Wikipedia

    Scientific method is “a method or procedure…consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses” – Wikipedia

    Nobel Laureate Dr. Milton Friedman argued that “there is a continuum of assets possessing in various degrees the qualities we attribute to the ideal construct of ‘money’ and hence there is no unique way to draw a line separating ‘money’ from ‘near-moneys’” (1960, p. 90). (or money products from savings’ products).

    “Economics calls for the study of abstract constructions at the same time that it requires the observation and analysis of facts” – MAURICE ALLAIS

    “The only relevant test of the validity of a hypothesis is comparison of prediction with experience.” – Nobel Laureate Dr. Milton Friedman

  8. Gravatar of ssumner ssumner
    27. March 2023 at 08:29

    William, Divisia indices are better, but I still don’t think they are good enough to be useful.

  9. Gravatar of TheManFromFairwinds TheManFromFairwinds
    27. March 2023 at 12:34

    The conversation around the inverted yield curve doesn’t make a lot of sense to me. In an inflationary environment, what we should care about is the real yield curve. If we expect inflation to come down to normal levels in 5 years then the nominal yield curve should be negative.

    Likewise in terms of unemployment I would expect companies to prefer giving raises that don’t keep up with inflation rather than big layoffs. Sticky wages don’t apply in inflationary economies as it’s easier to lower your (real) wage bills. So if we’re judging soft/hard on employment I would lean heavily on the first.

  10. Gravatar of Spencer Spencer
    27. March 2023 at 12:48

    There is no such thing as the “wage-price spiral”; the “price-wage spiral”; or the “cost-push spiral”; in the sense that increases in wages, prices, or costs are causes of inflation.

    Unless effective demands (money times transactions’ velocity) are adequate to prevent a cutback in sales, or a diversion of purchasing power to the price raisers, any administered increase in prices will result in less sales, smaller outputs, less employment, lower payrolls and less demand for products—in other words, depression and deflation in due course.

  11. Gravatar of c8to c8to
    27. March 2023 at 14:34

    I’m half with you on AI. Its bloody amazing and i think actually encapsulates intelligence, but maybe it just automates a bunch of stuff that doesn’t really need to be done – more university and health administrators, more call centers, more insurance back and forth – who cares – there was probably less of that stuff anyway in the 50s – 70s.

    Maybe it comes up with some new drugs or therapies, that then get held up in beauracratic nonsense anyway – its not going to be fixing the subway, repairing bridges, or allowing more building anytime soon…

    why aren’t there 1000s of people repairing bridges and cleaning the subway already – whats the constraint in labour markets, its hardly lack of bodies… whats your public choice read? lack of incentives, at both the beauracratic and labour market level? I would pay subway cleaners 100K a year and welders 200-300K a year to fix bridges… thats some real QE (ironic)

  12. Gravatar of Andrew C Andrew C
    27. March 2023 at 15:07

    A lot of talk of soft and hard landings is too euphemistic, imo. What would you characterize as a soft landing, a hard landing, and a softish landing? Thanks

  13. Gravatar of Cameron Blank Cameron Blank
    27. March 2023 at 15:26

    Is there an attempt to model recession odds based on financial market prices? At the moment equities don’t seem to be predicting a recession, commodities aren’t shouting recession (although this is a tougher read due to supply side issues), and interest rates are looking less rosy, but still not terrible.

  14. Gravatar of ssumner ssumner
    27. March 2023 at 15:34

    c8to, We’ve become increasingly inefficient due to regulation, pretty much in the way predicted by Mancur Olson.

    Andrew, Soft would be no recession. Softish would be a recession but unemployment never reaches 5%. Hard would be a normal recession, where the unemployment rate rises by more than 200 basis points (from the 3.4% low).

    Cameron, I’m sure there are many models, none of them very good.

  15. Gravatar of Michael Sandifer Michael Sandifer
    28. March 2023 at 01:06

    I think it’s a mistake to think of the AI revolution and effects on productivity growth within the frameworks of prior technological revolutions. We’re approaching a point, like before the scientific, industrial, and agricultural revolutions, in which the very character of productivity growth will likely change forever. Those revolutions led to permanently higher productivity growth, representing a hockey stick in the context of human history, and prehistory. By contrast, the AI revolution will result in a hockey stick of the rate of growth of productivity. The age of automating automation has dawned.

    And let’s not forget, that we’re also ultimately automating innovation, which can eventually self-scale.

  16. Gravatar of ssumner ssumner
    28. March 2023 at 07:51

    Michael, Yes, but we are a long way from the revolution you describe. You may someday be able to say “I told you so”, but I won’t be alive to hear you say it.

  17. Gravatar of Michael Sandifer Michael Sandifer
    28. March 2023 at 08:42


    I don’t pretend to know how much progress will be made in your lifetime or mine, but I think that, at the very least, a late 90s-like productivity boom is due sooner, rather than later, if we aren’t in it already.

    Anecdotally, I started learning to code in Python in earnest about a month ago. With the help of ChatGPT, a coworker and I have already almost entirely automated all of our shared work processes. Next, we will attempt to automated virtually every other manual process as well.

    I was a Luddite, just using Excel, lucky to write macros that even produced results. Now, I’m automating processes using multiple software packages within a single programming interface, despite barely being able to read the code that’s being written. In fact, there are plenty of lines of this code I can’t read yet!

    You may be underestimating the impact these large language transformer models will have on productivity in the near future.

  18. Gravatar of Spencer Spencer
    28. March 2023 at 10:30

    The rate-of-change in our means-of-payment money supply is still decelerating. The 6-month roc is negative. But we don’t get a recession until the 10-month roc becomes negative.

    The distributed lag effect of monetary flows, the volume and velocity, have been mathematical constants (using required reserve figures).

    Considering the deposit shifts, there’s been an increase in Vt during March.

  19. Gravatar of Spencer Spencer
    28. March 2023 at 10:53,drawing%20right%20certificate%20account%2C%22%20and%20%22Treasury%20currency%20outstanding.

    Assets: Other Factors Supplying Reserve Balances: Total Factors Supplying Reserve Funds: Wednesday Level (WTFSRFL)

    The FED has temporarily reversed course in March.

  20. Gravatar of Sara Sara
    28. March 2023 at 19:02

    Notice how he says “please keep asking me” about AI.

    In other words, he doesn’t want you to ask anyone else. Only him.

    Do you see the arrogance here.

    1. He believes we want his opinion about AI. A 70 year old barely literate economist who cannot find a word document without help from an assistant.
    2. But we should only ask him about AI.

    Don’t ask Musk. Don’t ask one of those horrible no-good rotten Austrians about technology and economy. Don’t ask the horrible “hard right” or an “anti-scientist” or anyone else who has not fully “recalibrated” their minds to obey and submit to the “expert mind”. Of course all of these so-called “experts” are hand-picked, and carefully chosen by the sacred regime under which he worships. But don’t think about that. Because they know what’s best for you. And what is best is a one-world-NATO.

    So ask away. But only ask him.

  21. Gravatar of ssumner ssumner
    29. March 2023 at 07:37

    Michael, Maybe.

    Sara, You said:

    “Notice how he says “please keep asking me” about AI.”

    And people wonder why I keep asking commenters if they know how to read.

  22. Gravatar of Kangaroo Kangaroo
    29. March 2023 at 20:06


    Yes, this is my understanding, they are excellent at writing code. So here’s the big question: if they can write more efficient code at 100x the rate of humans, what code would they write? IOW, will they allow the tech workforce to at least remain stable or better yet grow because their productivity generates amazing new opportunities, or will they just replace the humans that are coding now, thus increasing productivity but shrinking the tech workforce?

  23. Gravatar of seer of things seer of things
    29. March 2023 at 22:14

    A quote… “I’ll believe it when I see trend RGDP moving back above 2%.”

    Suppose the labour force won’t grow faster than 1% in the medium to long term. This implies that labour productivity has to be at least 1% in order for 2% RGDP growth to happen. But if there is some sort of productivity boom it gets priced into assets and then people retire sooner and people that can influence the number of days or hours worked simply work less. There may be reasons why, other than the law of large numbers, that productivity growth averages to IIRC approx 1% if you use a running average to get rid of short term fluctuations.

  24. Gravatar of Ricardo Ricardo
    30. March 2023 at 02:31

    Sumner’s left wing thugs are coming after free speech via the “restrict act”.

    Call your Senators before the woke army he commands gets it passed.

  25. Gravatar of Michael Sandifer Michael Sandifer
    30. March 2023 at 04:42


    I’ll end by saying that there doesn’t seem to be much of a J-curve necessary to begin widespread application of this transformer LLM technology in business. I’m already building a website on a cloud server, which I’d never done, and can develop an endless array of GPT-3 and GPT-4 enabled applications. It doesn’t require advanced programming skills.

    There are claims that no technology has ever been adopted more quickly.

  26. Gravatar of Michael Sandifer Michael Sandifer
    30. March 2023 at 04:49


    ChatGPT makes a lot of mistakes and has some obvious and even surprising limitations, but it still allows for more rapid code development and the learning of code development than before.

    It seems to be a productivity enhancing tool for developers, more than anything else, but it could replace low-level developers who were only capable of writing boilerplate code.

    2. April 2023 at 19:11

    Can we derive a monetary policy regime from first principles: an objective function (something like real growth maximization) and constraints (how easily relative prices change, shocks that relative prices would change in response to, how different monetary instruments affect prices, etc.)?

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