The annual American Economic Association gathering of the nation’s top economists brought mixed sentiments. On one hand, they are relieved the U.S. is seemingly on track for economic growth in the short term instead of facing a recession. However, their concerns shift towards the long-term outlook and whether growth will surpass pre-pandemic levels. They find themselves perplexed by their earlier failure to anticipate what appears to be a “soft landing” — an economy with controlled inflation and no recession.
Several factors have contributed to this unexpected outcome. Many of the economic wounds inflicted by the pandemic have healed, including immigration and labor force participation, leading to sustained job growth and moderated wage increases. Additionally, supply chain disruptions have largely been resolved, contributing to a more stable economic environment.
But concerns linger about inflation not fully returning to the Federal Reserve’s 2% target, which could necessitate further interest rate adjustments. Investors are anticipating rate cuts by the Fed, starting as early as March.
When looking at the long-term horizon, economists are less optimistic. They believe that merely returning to pre-pandemic trends will not substantially boost long-term growth. Sustainable growth must stem from productivity improvements to counteract challenges like an aging population, global conflicts, and fragmented international trade.
Policymakers must be mindful of the potential negative repercussions of reversing productivity gains resulting from globalization and free-trade agreements, as protectionist measures can hinder economic growth.
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