Economic forecasters on jobs, inflation and housing
SYLVIE DOUGLIS, BYLINE: This is PLANET MONEY from NPR.
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MARY CHILDS, HOST:
Hello, and welcome back to PLANET MONEY Predictions. The show where economic forecasters make economic forecasts.
AMANDA ARONCZYK, HOST:
And then come back later to gloat about what they got right and to own what they got wrong.
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CHILDS: Previously on the show, there's been victory, defeat, laughter, tears and a lot of humility.
ARONCZYK: In our last episode, two economists went head to head.
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ALFREDO ROMERO: I felt like the match was Terminator v. Roomba.
ARONCZYK: That was Alfredo Romero, aka the Roomba. And as he implicitly predicted, indeed, he lost to the Terminator, Diane Swonk.
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DIANE SWONK: It's great to be here (laughter), as humbling as it is.
CHILDS: Then we pitted Diane against a new challenger, Sung Won Sohn, and both of them told us what they thought the year had in store.
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SUNG WON SOHN: Hopefully, I'll tell you I was right 100%.
ARONCZYK: For PLANET MONEY Predictions, I'm Amanda Aronczyk.
CHILDS: And I'm Mary Childs. On today's episode of PLANET MONEY Predictions, we welcome back Diane and Sung to see whose predictions were more right on three of the most pressing economic issues of our economic moment.
ARONCZYK: Home prices.
CHILDS: And the winner of that faceoff will meet our newest contender.
ARONCZYK: Through it all, we'll try to understand what is going on in the U.S. economy.
CHILDS: That's on PLANET MONEY Predictions after this message.
ARONCZYK: And we're back on PLANET MONEY Predictions, where distinguished, award-winning economic forecasters are pitted against each other to find out who can tell the future more accurately.
CHILDS: Early last year, two contestants came on our show to make their forecasts in three categories - home prices, jobs and inflation, to tell us how the economy would be doing at the end of 2022.
ARONCZYK: Today we check their answers. Whoever's prediction got closer to the right answer wins that category. Whoever wins the most categories is our new winner. And then in the second half of today's show, our champion will go on to face a new challenger and tell us what they think will happen for the rest of 2023.
CHILDS: So now today, the Terminator is back.
ARONCZYK: We are going to bring on our first guest, Diane Swonk, chief economist at KPMG. Diane, this is your third appearance on PLANET MONEY Predictions. You are a three-peat guest. Welcome back. We're so happy to see you.
SWONK: I guess I wasn't so bad last time, although who knows (laughter)?
ARONCZYK: Diane won our last round of predictions.
CHILDS: You won by most closely predicting 2 of our 3 categories. Congratulations again.
SWONK: Thank you.
CHILDS: I was curious how you celebrated, like, if you went out for a fancy...
CHILDS: ...Chicken dinner, if you told people - like, how you bragged about this.
SWONK: You know, I don't celebrate the win so much because I know to be one of the top forecasters, guess what? You had to be right 50% of the time. Pretty humbling, you know? I'm tied with the flip of a coin. So, you know, I don't celebrate too much the wins because I have to deal with the losses, as well.
ARONCZYK: And back again is Diane's challenger, Sung Won Sohn, professor of economics at Loyola Marymount University.
SOHN: Very happy to be back. Thanks for inviting me.
CHILDS: Well, thank you for joining us. To remind you, we pitted you against famed predictor Diane Swonk. And I'm curious how you feel about your odds coming back into this game.
SOHN: I feel pretty good about my prediction a year ago.
ARONCZYK: Yeah, Sung feels pretty good because he has faith in his methods.
SOHN: I begin with the data, and then I try to talk to a lot of people because the economic data that we get from Washington and elsewhere - these are lagging indicators, what has happened in the past. I want to know what is happening now and today.
CHILDS: Now, just to remind you, last February, the full-scale war in Ukraine was just getting started. Interest rates were very, very, very low. There were jobs, jobs, jobs. And inflation was hot, hot, hot.
ARONCZYK: And that is our first category - inflation. On our last Predictions episode, we asked our forecasters to predict what the inflation rate would be for the rest of 2022.
CHILDS: Specifically, we asked them to predict the change in the Consumer Price Index, also known as CPI, compared to the previous year. It's the standard measure of inflation. It tracks the prices of the stuff households buy - housing, gas, food, health care and essentially everything else. OK, first up, Diane.
ARONCZYK: You predicted that inflation would cool, that the Consumer Price Index for 2022 would be rising at a pretty normal 2.3%. Does that sound like that's what you predicted? Is that right?
SWONK: Oh, I'm sure I predicted it, but it's wrong (laughter).
CHILDS: You are right. You were wrong. The actual answer is that prices rose by 6.5% last year.
SWONK: Yep, they sure did.
ARONCZYK: Diane did tell us at the time that a prediction was contingent on Russia not invading Ukraine, which, obviously, it did. And last year, that's one of the things that kept inflation high.
CHILDS: And in response, starting last year, the Federal Reserve raised interest rates a lot of times to cool the economy and bring inflation down. And inflation did come down but not as much as the Fed and Diane thought and hoped it would.
ARONCZYK: So bad if you like buying power and good if you're Sung.
CHILDS: Because, Sung, you predicted that inflation would still be somewhat high last year, at 5.5%, which is a lot closer to the actual rate of 6.5%. Ding.
ARONCZYK: Congratulations. Sung, you won this category.
SOHN: Wow. Great. Thank you very much. So what do I get?
CHILDS: Good question. What does he get?
SOHN: You invited me back to the show, and that is a prize enough for me.
ARONCZYK: Sung, thank you for being so gracious about our lack of prizes. That brings us to our second category - housing prices. As you may recall, the housing market was hotter than Beyonce tickets, with everyone suddenly trying to buy a bigger house with a home office and millennials trying to buy a home at all, ever. So what happened?
CHILDS: To measure home prices we use the annual change in the Case-Shiller National Home Price Index through the end of 2022.
ARONCZYK: So, Sung, you predicted that housing prices would go up by a whopping 12%. Diane Swonk - she predicted housing prices would go up by a more modest 8%. The correct answer is that housing prices went up 5.8% last year. So Sung, I'm afraid in this category Diane has won.
SOHN: Sorry about that.
ARONCZYK: You don't have to be - we're sorry.
CHILDS: Yeah, we're sorry. I want everyone to win.
ARONCZYK: Diane Swonk predicted that housing prices would stop going up so fast by the end of last year. So - ding. Diane won.
SWONK: So I got that one on housing prices. Yeah. But the hard part is that, you know, I'd like to see housing prices cool a bit. Any time, you know, a home that's affordable gets on the market, it's got a bidding war on it. And it's really - you know, they're doing adjustable-rate mortgages to try to afford it and hoping that a year from now those mortgages will go down. But this is tough.
ARONCZYK: Diane, I thought you would enjoy your win a little bit longer before pivoting to the actual real-world impact of home prices.
SWONK: Sorry. You know, like I said...
ARONCZYK: That's fair. That's fair.
SWONK: You can't take away...
ARONCZYK: No, it's fair.
ARONCZYK: I understand.
CHILDS: She won't do it, Amanda.
ARONCZYK: Life is not actually a game show. Yeah, I hear that.
That brings us to our final category - jobs. How many jobs did the U.S. economy add per month last year? Diane - she predicted that there would be an average of 200,000 jobs per month.
CHILDS: Which is pretty high compared to the historical norms. Like, the historical average was 125,000 jobs per month. And the U.S. economy only needs to create 70,000 to 100,000 jobs to keep up with population growth.
ARONCZYK: But we've had some wacky months lately. Employment fell off a cliff at the start of the pandemic and has basically been climbing ever since. Then there were too many jobs and not enough workers, so predicting this number has been really hard, and it's kind of the one everyone's been hyperfocused on.
CHILDS: Sung - he forecast a robust 350,000 jobs per month. That is a lot of jobs. And the correct answer was what Sung predicted, about 350,000 a month. So ding, ding, ding, ding, ding.
SOHN: Wow. I told you.
ARONCZYK: The exact number was 352,000 a month. So, Sung, how does it feel to be so right?
SOHN: You mean I missed it by 2,000 - how did I do that? I assumed that the economy would come back, especially in employment. And it did.
ARONCZYK: So what this means is that, Sung, because you won our jobs category and our inflation category, you are our new Predictions winner.
SOHN: Great. I'm so overjoyed. So, you know, I told you I'm good.
CHILDS: He is good. His prediction was literally 0.57% off. That is unheard of. If Diane was the Terminator, maybe Sung is the Exactonator (ph). OK? Does it work?
ARONCZYK: Maybe. But sadly, his precision means we have to say goodbye to Diane Swonk. Diane, do you have any words for our new champion?
SWONK: Oh, congratulations and my condolences because (laughter) I know it is so hard to do any predicting in this economy.
CHILDS: This economy has been all over the place. Going into last year, it was refusing to slow down. Everyone kept saying it was going to, and it just wouldn't.
SWONK: The speed with which we entered 2022 was sort of stunning. And then we had two negative quarters in the first half of 2022. Everyone forgets that. It wasn't a recession, but we had two negative quarters, and we created 4.8 million jobs. I mean, you just can't make this stuff up. As an economist, this is not, like, on your bingo card of things that are likely to happen, you know?
CHILDS: So now we throw away our 2022 bingo cards - maybe we burn them - and we turn to 2023. And our winner, Sung Won Sohn, is going to stick around and face off with a new challenger to tell us exactly what they think will happen this year after the break.
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CHILDS: Now is the time in the show where the real risk-taking happens, predicting what will happen in the economy between now and the end of the year.
ARONCZYK: Then in the new year - oh, my God, it'll be 2024.
CHILDS: No. Come on. Can we check that? That can't be right.
ARONCZYK: I know. We're going to fact-check that. In 2024, we will check back in with both economists and see who got closest to what really happened.
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CHILDS: So now let's introduce our new contender. Welcome to Joe Brusuelas. He is the chief economist at RSM, the fifth-largest audit tax and consulting firm in the world. Joe, come on down, and thanks for joining us.
JOE BRUSUELAS: Thank you for having me.
CHILDS: And to remind you, we are pitting you against the famed economist Sung Won Sohn on three predictions about the economy. So what do you feel your odds are of making better predictions than Sung? Do you feel confident? Can you predict who's going to win?
BRUSUELAS: Well, I think when we look at forecasting, we always think about who's going to be wrong the less, right?
ARONCZYK: Because in predictions, no one's perfect. So let's find out who's right the more for 2023. Our first category - inflation. This is a tough one for forecasters because in the last couple of years, many of us were wrong about inflation. We thought - hoped it was just paying us a little visit. But instead, inflation settled in, hung its clothes in the closet. It has been hard to get rid of, and it's making our daily lives less and less affordable.
CHILDS: Right now, inflation is at 5%. So we asked our contestants, where will we end the year?
BRUSUELAS: We expect overall inflation to decline to 3% by the end of the year.
CHILDS: Can you unpack the why of this? Like, what is the thing causing inflation to cool?
BRUSUELAS: Well, the primary thing is the unsnarling of the global and American supply chains. Moreover, you're going to continue to see - and this is really important - the price of food and gasoline continue to ease. And that will provide much-needed relief for beleaguered households who've gone through two years of an inflation shock.
CHILDS: Sung is a little less optimistic, but he does think that the worst is over.
SOHN: Inflation has peaked. It is in the process of decelerating, and in 2023 I'm looking at 4% inflation rate.
ARONCZYK: So they both seem to think the Fed is slowly winning its fight against inflation, kind of - not as much as we would want, but still basically winning.
CHILDS: They gave different reasons as to why higher-than-normal inflation is sticking around. Joe said he was thinking about supply chains and energy prices relative to last year and also rent and home prices. To Sung, it's about labor and productivity.
SOHN: The reason why it remains at a high level is labor cost. Inflation has been outpacing wage gains.
CHILDS: Sung is saying that inflation has generally been higher than wage increases, the raises we have hopefully been getting at our jobs. So he sees that this year, as the labor market is still tight, people can ask to get paid even more. So he predicts labor costs will keep going up, which will keep inflation higher than it was pre-pandemic.
SOHN: Inflation is going to be with us for quite some time, and we better get used to it.
CHILDS: What if I really don't want to?
ARONCZYK: Doesn't matter - we're going to move on to our next category - jobs.
ARONCZYK: We asked our forecasters, how many jobs will the U.S. economy add every month through the end of the year?
SOHN: I am predicting 150,000 jobs, which means that the labor market will remain fairly tight. And that's going to continue for a while.
ARONCZYK: A hundred and fifty thousand is way less than his very accurate 2022 prediction, but that's still a lot of jobs - above the historical average. Now, let's hear Joe's forecast.
BRUSUELAS: I'm expecting 125,000 jobs to be created per month on average through the end of the year.
CHILDS: Joe's number is lower than Sung's, but he agrees the labor market is going to stay hot, hot, hot. He says there's a huge wave of folks retiring. Plus the country has had less immigration in recent years, fewer workers coming in, and the younger generation aging into the workforce isn't big enough to offset all that.
ARONCZYK: So for the foreseeable future, what he sees is not enough workers to fill all the available jobs. It's still going to be a tight labor market.
BRUSUELAS: Inside my own internal survey that we run for our clients, over half of them actually increased hiring during the second quarter of the year, and a full 60% are telling me they intend to do so in the second half of the year. So I'm expecting, even if the economy slows, the unemployment rate to remain very low. And for many people, this is - really might be as good as it gets in terms of being able to find a job or being able to find another job at higher wages.
CHILDS: OK, so Joe wants you to go out and get those jobs, folks. Our final category - home prices. Home prices had been going up pretty steadily for more than a decade. Then they went bananas during the pandemic, and now things are cooling off.
BRUSUELAS: I think we'll see around a 1.5% increase in home prices. That's below the 3 to 5% you might want to see or identify as stable. But given the absolute unsustainable increase in home prices we observed during the pandemic, this is about as good as one could hope for.
ARONCZYK: So a 1.5% increase - that is Joe's prediction.
CHILDS: Sung thinks the slowdown in housing prices is going to be even more dramatic. Mortgage rates are high, so lots of people can't afford to buy.
ARONCZYK: But with higher wages, which we also have, some people can afford to buy.
CHILDS: But people worrying about a recession are too scared to buy.
SOHN: So when you put the positives and negatives together, I think the house price game will be flat - no increase.
CHILDS: No increase. OK, so that's jobs, inflation and home prices.
ARONCZYK: We also have for you today a bonus category. This is not usually part of our game show, but of course, everyone wants to know one big thing - will there be a recession this year? So we asked our predictors.
CHILDS: And Joe's data does point to a recession. Looking at those recent episodes of banking stress and bank failures, smaller banks are feeling a little risk averse and have pulled back on lending, which tends to slow things down.
BRUSUELAS: Our recession call is there's a 75% probability of a recession over the next 12 months. That's due to the lagged impact of those interest rate hikes and the tightening of credit we can really see at the local and regional banks.
CHILDS: So that's what the formal view from his firm is. But right now, if you ask Joe if there's going to be a recession...
BRUSUELAS: My sense is, right now, no. We're not going to have a recession. But there are severe risks around that. And if we have a unexpected crisis - I don't know, say a debt ceiling crisis mid-year, that could be the tipping point between a recession and a slower period of growth.
CHILDS: So it's a gentle no on the recession question, if our government manages to function.
ARONCZYK: Sung sees a pretty similar headline, but with different details.
SOHN: We are not going into an outright economic recession. I've been predicting what we call a rolling economic recession where each sector takes turns going into recession, but not together.
ARONCZYK: This means that a recession is rolling through one or two sectors at a time. So while housing and tech are contracting, industries like aerospace are doing really well - maybe well enough to keep us out of a full-on recession.
CHILDS: So this time on PLANET MONEY Predictions, our experts are kind of meeting in the middle. I guess things are settling down a little bit in this post-pandemic economy because they kind of agree - no recession. They see a pretty tight range on inflation and jobs, housing flat or up so marginally you could miss it. It's a predictions faceoff of small differences.
ARONCZYK: Yeah. And given that last time one contender's forecast was off by just 0.57%, this is a battle with decimal points and exacto knives. We'll see whose predictions are the sharpest next time. Best of luck to both contestants.
CHILDS: Lovely to see you. Thank you so much for playing, and I'll see you in a couple of months, I guess.
BRUSUELAS: You got it.
CHILDS: And Sung, you'll be back for the next round.
SOHN: OK, great. I'm so excited and thrilled that you'd invite me back again.
CHILDS: What's going to happen in the economy? Will we all get raises? And who will win the lack of prize? Find out all this and more on our next installment of the PLANET MONEY Predictions and Forecasting Competition Show Challenge.
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CHILDS: This episode was produced by James Sneed. It was engineered by Katherine Silva, fact-checked by Sierra Juarez and edited by Molly Messick. Jess Jiang is our acting executive producer.
ARONCZYK: And before we go, a quick shout-out to our PLANET MONEY Plus listeners.
ARONCZYK: Your support helps keep NPR going. And a little reminder. A little thank you for that support - you get access to our bonus episodes, which come out every other Monday. Those episodes feature extended interviews with experts and economists, behind the scenes content and more.
CHILDS: And if you're not a PLANET MONEY Plus supporter, it's easy to sign up at plus.npr.org. I'm Mary Childs.
ARONCZYK: And I'm Amanda Aronczyk. This is NPR. Thanks for listening.
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