With inflation slowing and hiring staying strong, economists are now venturing to think that anything short of a recession could be imminent — the so-called soft landing.
This is a real change from earlier this year. In February, economists predicted that the United States was on the verge of a recession (thanks to the Federal Reserve’s 11 interest rate hikes since the beginning of 2022 and signs of rising inflation) with businesses and consumers tired. Possibly they would be stopping spending.
Yet so far, the economy has continued to plow ahead, and inflation is retreating faster than some economists expected. Some types of products are even seeing deflation, or a decline in prices compared with a year ago. The Federal Reserve sounded cautiously optimistic on Wednesday, with Chair Jerome Powell saying he was “pleased with the progress” in the battle against inflation and the Fed’s goal of keeping full employment.
“I have thought, from the beginning, that there was a possibility, because of the unusual situation, that the economy would simply calm down in a way that would allow inflation to come down without the significant job losses that have occasionally been associated with senior management. inflation and tightening cycles,” Powell said Wednesday.
This year, the U. S. economy has seen a rare confluence of trends, with inflation slowing, especially as the economy continues to grow, something “many economists consider impossible,” said Brian Rose, senior U. S. economist at UBS Global Wealth Management. note on Monday.
“We are confident that the economy is headed for a comfortable landing,” he added.
Here’s what you want to know about a comfortable landing.
A soft landing is “the equivalent of ‘Goldilocks’ porridge’ for central bankers: following a tightening, the economy is just right – neither too hot (inflationary) nor too cold (in a recession),” noted Sam Boocker and David Wessel of the Brookings Institution.
But, they say, there is no official definition of a soft landing, and the National Bureau of Economic Research (NBER), which determines when the U. S. is officially in recession, does specify the needs for a soft landing, or a hard landing. landing, for that matter.
A recession is sometimes thought of as two consecutive quarters of declining economic growth, but the NBER describes it a bit more broadly: “a recession refers to a significant decline in economic activity that spreads into the economy and lasts more than a few months. “
Recessions are typically accompanied by a decline in GDP and increased job losses, as is the case for most Americans. During the Great Recession, about 700,000 people lost their jobs each month between October 2008 and April 2009, according to Brookings. .
In a soft landing, the unemployment rate might rise, but the incline would be far from the extremes experienced in the Great Recession, when the jobless rate jumped from 5% to 10%.
Right now, the Federal Reserve forecasts that the unemployment rate will reach 4. 1% by 2024 and 2025, up from its current rate of 3. 7%.
It also marks a decline from the Federal Reserve’s projection of the 2022 unemployment rate to 4. 4%, resulting in the loss of another 1. 2 million people. But until now, corporations have been reluctant to lay off workers, given a tough, tight labor market that makes it harder to retain and hire employees.
Part of the good news about a comfortable landing is that inflation is expected to continue to slow from its current point of 3. 1%. And consumers may simply raise their standard of living, given that employers are announcing that they will raise wages by as much as 4%. next year.
The Fed, for its part, is forecasting that inflation as measured by the PCE index will sink to 2.4% next year. On Wednesday, the central bank held off on boosting rates, while also projecting three rate cuts in 2024.
“[T]he inflation has surprised its downward projections, and this progress allows the Federal Reserve to take its foot off the pedal of the political brakes faster than expected,” TD Securities analysts said in a research note published Wednesday.
A recession is still possible, of course. Powell stressed in his comments on Wednesday that while he’s pleased with the economy’s progress, he isn’t declaring victory yet.
“I think there’s a probability that there will be a recession next year, and that’s a significant probability regardless of where the economy is,” Powell said.
In fact, some economists are still predicting a recession later in 2024.
“PNC expects customer spending to decline in the second half of 2024 as the U. S. economy enters a mild recession,” PNC analysts said in a study note. “High interest rates and modest job losses will make families more cautious. “
A majority of Americans say their incomes are not keeping up with inflation. This leaves many other people dissatisfied with the economy, even though the unemployment rate remains low and the economy continues to grow.
Powell nodded his head Wednesday about the factor: Consumers are very sensitive to prices, but wages are recovering.
“People are still living on high prices, and that’s something they don’t like,” he said. “Real wages are now positive, so they’re now emerging more than inflation as inflation comes down, and that can help people’s morale. “”.
Quotes were delayed by at least 15 minutes.
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