Who Gets Credit for No-Recession 2023? Everyone and No One

‘Tis the season … for yearend economic retrospectives, which are all over the financial press this week. This year, one central theme seems common: The US and global economies fared far better than forecasters projected, with no US recession and mere pockets of weakness elsewhere in the developed world. It all amounts to a growing global economy that supported stocks’ young bull market, with slowing inflation to boot! So high fives all around, but these pieces go a step further, pondering who should get the credit. What should investors make of the whole conversation?

A long feature in Monday’s Washington Post zeroed in on the central question: Did this better-than-expected year result from Fed and White House policy, or are policymakers perhaps taking too much credit for improvement that would have come naturally as supply bottlenecks uncorked and energy prices calmed?^[i] It explored both sides in detail but seemed to sympathize more with the view that people in important Washington, DC jobs engineered a “soft landing.” (As did many other pieces in recent days.) It is reminiscent of when people credited 2017’s tax cuts for 2018’s GDP reacceleration. The economy is far too decentralized for policymakers to have anywhere near as much influence as these stories seem to suggest—a key point to keep in mind as both parties start pumping their economic bona fides on the march to next year’s election.

Those who give the Fed and the feds credit cite Chair Jerome Powell and co.’s rate hikes for taming supposedly demand-driven inflation and the Biden administration for helping supply by opening the strategic petroleum reserve (SPR), getting ports to run 24/7, unlocking oil drilling and throwing massive subsidies at semiconductors, green energy and the like. Reality seems more nuanced, and that view has nothing to do with which party is in charge—this is about policy impacts only.

Take rate hikes, and the simple question of whether the Fed actually curbed demand. Well, the evidence is lacking. Consumer demand accelerated as the year progressed, while business investment bobbed around in line with its post-pandemic trend. Broad money supply began contracting and loan growth slowed, but this appears tied more to banks’ and depositors’ changes in behavior (and risk management) after springtime regional banking woes. Banks’ deposit costs remain well below fed-funds rates, and net interest margins are up over the last year.^[ii] For all the talk of a “soft landing,” I think it is hard to find a landing at all. Where is the descent?

As for the White House policy front, getting the ports to run flat out probably helped. The others, probably not so much. As this venerable (ish) website opined at the time, opening the SPR hardly moved the needle on global oil supply. US oil production is up to record highs this year. But considering most of that supply comes from existing fields and private land, it seems like a stretch to credit the administration’s recent permitting decisions, which would take time to start delivering results anyway. Just as 2021’s freeze on permits on some federal lands wasn’t the massive supply constraint so many argued at the time, issuing them now isn’t unleashing a flood of crude. And regarding the subsidies, that just strains credulity. The first semiconductor subsidies were only just allotted, and new plants take years to build. The primary investment result of the green energy subsidies, in my view, was to encourage investors to chase a niche, profit-strained and credit sensitive industry, contributing to the deep slide in green energy stocks. With projects increasingly cancelled or delayed, the economic effects seem set to prove smaller than expected.

Understand, none of this is political. It doesn’t seem like the big spending bills passed by either party were responsible for last year’s hot inflation. The Fed? Different story. Its big money supply spike during lockdowns proved excessive in a supply-constrained economy. The failure to mop up excess once businesses reopened was key to spurring inflation—not public works (much of which was far-future spending anyway). Nor do I think 2017’s Tax Cuts and Jobs Act was some great stimulus. It might have put a little money back in consumers’ and businesses’ pockets, but plenty decided to save rather than spend, and businesses tend not to hinge long-term investment decisions on partisan tax cuts that the next administration can undo. (And that are scheduled to sunset anyway.) Looking back further, “stimulus payments” to some US households during the 2001 and 2007 – 2009 recessions likely just pulled demand forward. And shovel-ready infrastructure projects, always widely touted by whichever party is in charge at the time, are generally slow-moving and fruitless.

No, the basic, simple yet powerful story of the past few years appears to be this: It is far easier to turn an economy off, as lockdowns did in 2020, than it is to turn it on again—especially when different countries are firing back up at different times and speeds. The US got going before Europe got going before Japan got going before China. So you had demand boom in one place before supply in another was capable of meeting it. Even in the US, some states and industries reopened before others, creating a mismatch for made-in-the-USA goods and services. For just one example, I was back in the office before I could get my hair cut without crossing state lines.^[iii] First-world problem, maybe, but it is mostly a microcosm of the broader picture: Lockdown and reopening caused countless dislocations and disruptions that couldn’t resolve until the whole world, developed and developing, moved beyond lockdowns. Parallel to all of this, the world’s energy markets had to realign after Russia’s Ukraine invasion and the resulting sanctions, which shifted oil and natural gas supply and demand globally. That took a while, too, but at this point it is largely solved.

Furthermore, a lot of the reopening decisions in the US were business-specific, not government-ordained. When the economy was shut down, some companies innovated or otherwise managed through it, quickly returning to normal operations when allowed. Others waited. To each their own—no judgments here! The key is this: It speaks to how decentralized and messy a developed economy really is. In the Western world, as the UK has shown lately, governments can’t even order civil servants back to the office, much less private workers. In the end, businesses respond to conditions—all conditions—as incentives dictate.

Governments can tweak those incentives, but that is about it. A tax rate adjusts but doesn’t dictate the long-term return of a new investment and whether that investment is worth the cost. Nor will a subsidy suddenly make a project worthwhile if the long-term return is minimal. Calculations like these, made every day, are what determine economic ups and downs. Executives hire when business is going well and they need more headcount to keep up, not because the Fed did this or that with interest rates. You take a vacation when you want to and you have the financial flexibility to do so, not because there was some big government travel push. To use one of the more famous summertime examples, President Biden did not order Taylor Swift to go on tour. Nor did the Fed print concert tickets. It all just happened in the messiness of private-sector business decisions.

So it has been, and so it shall be. Yet prepare yourself now for politicians in both parties promising magic policies to bring inflation further to heel while growing the economy, ending boom and bust and ensuring free puppies and kittens for all. Expect more hero-worshipping articles portraying Fed head Jerome Powell as the Wizard of Oz pulling all his levers to make things work just so.^[iv] Expect a nearly endless chorus giving Washington credit for the personal risk-taking and commercial decisions that actually make the economy grow and the stock market rise.

Ditch the narratives around who has their hand on the economy’s tiller—and whether that hand is steady or shaky. The most powerful hand is the invisible one. Yes, bad policies can stir uncertainty that deters risk-taking. But that doesn’t mean policy is always a catalyst for everything that happens. Most of the time, it is just there, running in the background, while the rest of us get on with normal activity.