Nation’s Top Economists Are Short-Term Happy, Long-Term Glum

The U.S. recovery has been stronger than in other developed countries. PHOTO: SPENCER PLATT/GETTY IMAGES
The U.S. recovery has been stronger than in other developed countries. PHOTO: SPENCER PLATT/GETTY IMAGES


At an annual gathering, academic economists are surprised and relieved over soft landing, but worry about what comes next.

SAN ANTONIO—The good news: the U.S. is headed for growth this year, not recession. The bad news: there is as yet little prospect growth will be any better than before the pandemic.

That, for now, is the consensus of economists speaking at the annual meeting of the discipline’s largest association.

A year earlier, when the American Economic Association met in New Orleans, attendees wrung their hands over their collective failure to spot the rise of inflation before it got out of hand, and assumed it would take higher unemployment and a recession to get it down.

This year, they are grappling with an entirely different question: how did they underestimate the prospects for what increasingly looks like a soft landing—tamed inflation without a recession? On Friday, the Labor Department reported payrolls rose solidly in December and unemployment remained close to a half-century low at 3.7%. Economists polled by Dow Jones Newswires expect the Labor Department to report on Thursday that consumer prices rose 3.3% in December from a year earlier.

“In early 2023, the U.S. economy was in a very different place than it is now," said Janice Eberly, an economist at Northwestern University.

Since then, much of the damage left by the pandemic has healed: Immigration and labor-force participation, especially among workers ages 25-54, has rebounded, allowing employers to keep hiring and wage growth to cool. Snarled supply chains have mostly normalized, according to an index maintained by the Federal Reserve Bank of New York.

“We didn’t really understand why inflation spiked in the first place. So maybe we shouldn’t be surprised that it came down faster than we thought, too," James Hines, economist at the University of Michigan, said.

Hines noted the U.S. recovery has been stronger than in other developed countries, which he attributed to the U.S. providing the lion’s share of its pandemic emergency support to individuals rather than firms. He said that kept consumers relatively stable while leaving room for new businesses to emerge and old ones to fail.

Still, some participants were reluctant to declare a soft landing a done deal, noting that by the broadest measures inflation still isn’t back to the Federal Reserve’s 2% target. That leaves open the possibility of it raising interest rates further, or not cutting them as much as hoped. Investors expect the Fed to start cutting interest rates in March, by a cumulative 1.5 percentage points this year, double what Fed officials projected in December.

“We’ve made a lot of progress towards a more sustainable path for the economy," said Lorie Logan, president of the Dallas Federal Reserve. But “inflation could pick back up and reverse the progress we’ve made."

Logan noted financial conditions have loosened since October, in the form of falling bond yields and rising stock prices, in response to softer economic data and comments from the Fed, developments that could bolster demand and inflation pressure. “We can’t count on sustaining price stability if we don’t maintain sufficiently restrictive financial conditions."

Economists were less optimistic about the long term than the prospects of a soft landing. In a presentation here, Eberly doubted recovering to prepandemic trends will boost long-term growth. That, she said, has to come from sustained boosts to productivity that counteract significant headwinds in the form of an aging population, increased global conflict, and more-fragmented international trade.

She pointed to a surge in hotel and restaurant productivity as the economy reopened, which she anecdotally attributed to practices such as waiters no longer shuttling checks between tables and the cash register and instead bringing a card reader to customers. But changes like that may be just one-off boosts, with productivity growth returning to its sluggish pace afterward.

The top candidates for long-term growth would be artificial intelligence; hybrid work arrangements that keep people, especially early-career women, in the workforce; and sustained higher levels of immigration, she said.

Productivity boosts are difficult to predict but can be long-lasting, said Glenn Hubbard of Columbia University. That makes it even more important that technology potentially as groundbreaking as AI is implemented in a way that complements rather than replaces workers, he said. For instance, federal assistance for workers displaced by trade has in the past stumbled at helping those displaced by labor-saving technology.

Implementation matters for political reasons as much as economic ones. While the benefits of higher productivity are typically diffuse and hard for most beneficiaries to notice, “the losers are concentrated and know who they are," Hubbard said.

Policymakers also risk reversing some of the productivity gains from globalization and free-trade agreements in recent decades in pursuit of political and national security goals, many economists at the gathering said.

“Most of the things that are going to be helpful are going to come from free markets—lots of trade, lots of investment," said Hines. “If you inhibit your drivers of growth, what do you think is going to happen?"

Papers presented at sessions about retrenching globalization showed that foreign direct investment patterns have shifted notably in the past few years, with American investors shunning China in favor of its allies, a process called “friend-shoring." The authors of the papers used United Nations voting records and treaty membership as proxies for aligned countries, and showed how the global investment flows are fragmenting.

In an ominous sign for the effects of degraded trade ties, John Lewis of the Bank of England presented a paper showing that the impact on trade flows from Brexit is as negative as it would have been in a “hard Brexit" scenario, despite the replacement trade agreement reached in late 2021 between the European Union and United Kingdom.

“The outlook over the coming years is negative in terms of global integration," said Emi Nakamura, a University of California, Berkeley economist, on a separate panel.

Write to Gabriel T. Rubin at

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