With inflation slowing and hiring still strong, economists now risk more than just a recession on the horizon: the so-called soft landing.
This is a real change from earlier this year. In February, economists predicted that the U. S. was on the brink of a recession (thanks to the Federal Reserve’s 11 interest rate hikes since early 2022 and signs of inflation) weary businesses and consumers would possibly be giving up spending.
So far, however, the economy has continued to grow and inflation is falling faster than some economists expected. Some types of products are even experiencing deflation or a drop in costs compared to a year ago. The Federal Reserve was cautiously positive on Wednesday. , and Chair Jerome Powell said he was “happy with the progress” in fighting inflation and the Federal Reserve’s goal of maintaining full employment.
“I have thought, from the beginning, that there was a possibility, due to the unusual situation, that the economy would simply calm down in a way that would allow inflation to come down without the significant task losses that have occasionally been associated with high charges. inflation and tightening cycles,” Powell said Wednesday.
This year, the U. S. economy has seen a rare confluence of trends, with inflation falling particularly as the economy has continued to grow, something “many economists consider impossible,” Brian Rose, senior economist at UBS Global Wealth Management, said in a study. 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. “
Typically, recessions are 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 the event of a hard landing, the unemployment rate could simply rise, but the slope would be far from the extremes seen in the Great Recession, when the unemployment rate rose from 5% to 10%.
Right now, the Fed is forecasting that the jobless rate will inch up to 4.1% for 2024 and 2025, slightly higher than its current rate of 3.7%.
That also marks a retreat from the Fed’s 2022 projection that the jobless rate would jump to 4.4%, resulting in an additional 1.2 million people losing their jobs. But, so far, companies have been loath to fire workers given a tight labor market that’s made it more difficult to maintain and hire employees.
Part of the good news about a soft landing is that inflation is projected to continue cooling from its current level of 3.1%. And that could help consumers increase their standard of living, given that employers say they’ll boost wages by 4% next year.
The Federal Reserve, for its part, expects PCE inflation to fall to 2. 4% next year. On Wednesday, the central bank postponed any rate hikes, though it also forecast 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.
Indeed, some economists are still predicting a recession, albeit 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 on that factor on Wednesday and said consumers are very value-sensitive, but wages are recovering.
“People are still living on high prices and it’s anything they don’t like,” he said. “Real wages are now positive, so now wages are emerging more than inflation as inflation falls, and this can help people’s morale. “
Quotes were delayed by at least 15 minutes.
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