Welcome to our State Space series. Here you will find how we’re thinking about the pathways and scenarios that could take us to critical economic states. We will never settle for "it's too unlikely." We try to reason backwards from the most important (tail-risk) scenarios, their most likely pathway to fruition, and the indicators that allow us to monitor the likelihood of each pathway. Today's post is an update on what we laid out at the beginning of the month. Updates will share how these pathways are (or are not) playing out, and if new risk scenarios are potentially emerging. If you are interested in more timely and extensive access to this content, feel free to reach out to us here.

Revised Baseline: Growth has been slowing but also stabilizing around a non-recessionary outcome, but the slowdown will now take place faster due to tighter credit conditions. Inflation will still take about 12-18 months to firmly come back to pre-pandemic norms, due to an elongated lag in housing services inflation and still-unresolved goods production challenges, which are still not showing the requisite scale of relief (e.g. autos). If credit conditions tighten more nonlinearly, we would still only marginally compress our timeline for disinflation (though it would add to future downside risk in 2024 and 2025).

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