Economists now predict that the United States is headed for a “soft landing.” Here's what that means.


With inflation cooling and hiring still strong, economists are now venturing that something more than a recession may be around the corner: a so-called soft landing.

This is a big change from earlier this year. Economists in February were they were predicting that the United States was on the verge of falling into a recession, thanks to the Federal Reserve's 11 interest rate hikes since the beginning of 2022 and signs that businesses and consumers tired of inflation could be reducing their spending .

So far, however, the economy has continued to advance and inflation is receding faster than some economists expected. Some types of products are even seeing deflation, or a drop in prices compared to a year ago. The Federal Reserve was cautiously optimistic on Wednesday, with Chairman Jerome Powell saying he was “pleased with the progress” in the battle against inflation and the Fed's goal of maintaining full employment.

“I have always felt, from the beginning, that there was a possibility, because of the unusual situation, that the economy could cool down in a way that would allow inflation to come down without the kind of large job losses that have often been associated with high inflation and tightening cycles,” Powell said Wednesday.

This year, the U.S. economy has created a rare confluence of trends, as inflation has cooled considerably while the economy continues to grow, something “many economists thought would be impossible,” said Brian Rose, senior U.S. economist at UBS Global Wealth. Management. in a research note on Monday.

“We maintain our view that the economy is headed for a soft landing,” he added.

Here's what you should know about a soft landing.

What is a soft landing?

A soft landing is “the equivalent of 'Goldilocks mush' for central bankers: after an adjustment, 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 noted, there is no official definition of a soft landing, and the National Bureau of Economic Research (NBER), which determines when the United States is in an official recession, does not outline the requirements for a soft landing, or a hard landing. landing, by the way.

How is that different from a recession?

A recession is generally considered two consecutive quarters of declining economic growth, but the NBER describes it a little more broadly: “a recession involves a significant decline in economic activity that spreads throughout the economy and lasts more than a few months.” “.

Recessions typically include a drop in GDP and an increase in job cuts, which is how most Americans typically experience a recession. During the Great Recession, about 700,000 people lost their jobs each month from October 2008 to April 2009, according to Brookings.

What happens to the labor market in a soft landing?

In a soft landing, the unemployment rate could rise, but the slope would be far from the extremes experienced in the Great Recession, when the unemployment rate jumped from 5% to 10%.

Right now, the Federal Reserve forecasts that the unemployment rate will slowly rise to 4.1% by 2024 and 2025, slightly above its current rate of 3.7%.

This also marks a setback from the Federal Reserve's 2022 projection that the unemployment rate would jump to 4.4%, causing an additional 1.2 million people to lose their jobs. But until now, companies have been reluctant to lay off workers because of a tight labor market that has made it more difficult to keep and hire employees.

What about inflation?

Part of the good news about a soft landing is that inflation is expected to continue to cool from its current level of 3.1%. And that could help consumers improve their standard of living, as employers say they will increase salaries by 4% next year.

The Federal Reserve, for its part, forecasts that inflation as measured by the PCE index will fall to 2.4% next year. On Wednesday, the central bank postponed raising rates, although it also projected three rate cuts in 2024.

“Inflation has surprised its projections to the downside, and that progress allows the Federal Reserve to consider lifting the policy brakes sooner than expected,” TD Securities analysts noted in a Wednesday research note.

Does this mean a recession? it's not in the cards?

Of course, a recession is still possible. Powell noted in his comments Wednesday that, while he is pleased with the economy's progress, he has not yet declared victory.

“I think there's always a chance that there will be a recession next year, and it's a significant chance no matter what the economy is doing,” Powell said.

In fact, some economists are still predicting a recession, albeit later in 2024.

“PNC expects a decline in consumer spending in the second half of 2024 as the U.S. economy enters a mild recession,” PNC analysts noted in a research note. “High interest rates and modest job losses will make households more cautious.”

If the economy is doing well, why do I feel like I'm falling behind?

Most Americans say their income is not up to date with inflation. This leaves many dissatisfied with the economy, even as the unemployment rate remains low and the economy continues to grow.

Powell nodded in agreement on this issue Wednesday, saying that consumers are very price-sensitive, but wages are catching up.

“People still live with high prices and that's something people don't like,” he said. “Real wages are now positive, so wages are now rising more than inflation as inflation goes down, and that could help improve people's morale.”

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