Every February, Americans gather in front of their televisions to watch a prairie dog in a small town in western Pennsylvania react as it pokes its head out of its burrow and sees its shadow in the snow. The quasi-ancient superstition of “Groundhog Day” has a lot of basis – winter or spring is just six weeks away – even if it’s just a collective figment of the imagination. For months, economists have been searching for signs of a “soft landing” for the economy as fears of a looming recession in 2022 have cooled and the pandemic faded further into memory.
So far, they still see shadows.
Last March, after inflation soared that sent shivers down Wall Street, hitting levels not seen since the early 1980s, Federal Reserve Chairman Jerome Powell raised interest rates sharply, essentially betting that the move would stem skyrocketing prices without actually causing the economy to shrink into recession. But that hasn’t stopped analysts and economists from touting dramatic and dire recession predictions, with some even comparing the coming recession to the “stagflation” of the 1970s, which was a combination of low economic growth and inflation. A toxic combination. Still, the most widely forecast recession in history is yet to come. Which begs the question: Do the prairie dogs of economics still see their shadow? Could Powell have achieved a soft landing?
Despite being derided by Wall Street, the Fed chairman has had much success steering the U.S. economy toward desired outcomes. GDP continues to grow despite increased borrowing costs for businesses and consumers; Inflation has fallen sharply from a pandemic high of 9.1% in June 2022 to 3.7% in August; Unemployment has remained steady below 4%.
But despite all the prairie dog holes in the economy, even the most optimistic prognosticators are reluctant to officially declare that a soft landing has arrived. Infrastructure Capital Management CEO Jay Hatfield has argued for more than a year that the economy would avoid recession due to a resilient labor market and a rapid decline in pandemic-related inflationary pressures. But even so, he noted that the risk of another regional banking crisis, spillover effects from Europe’s recession into the U.S., or an overly aggressive Fed means it’s too early to say the economy is safe.
“There’s enough risk that I don’t think we should declare victory on the call for a soft landing,” he told CNN wealth.
There are some lone voices willing to say, with great caution, that a soft landing may have occurred. Berkeley economics professor Brad DeLong argued in his influential Substack on Thursday that the pattern of inflation this year “is exactly what we’re seeing at a time when the economy is actually experiencing a successful soft landing.”
However, most economists are reluctant to formally make this decision. Here’s why, what they’re looking at, and why we may be stuck in Groundhog Day for some time to come, just like Bill Murray in the classic film of the same name.
When is the official soft landing?
Clearly, declaring a soft landing “victory” may be easier said than done.
There are several different common definitions of a U.S. recession. Investors often use a rule-of-thumb definition of a so-called “technical recession” — two quarters of negative GDP. Then there’s the judgment of the National Bureau of Economic Research (NBER), the official arbiter of the business cycle, which defines a recession as “a significant decline in economic activity that spreads throughout the economy and lasts for more than several months.” The National Bureau of Economic Research even convenes a secretive group of economists to sit in a room and determine whether that criterion is met before the government officially declares that the economy is (or was) in recession.
But when it comes to soft landing, there is no specific, widely accepted definition. That makes it a challenge to turn off the fasten seatbelt sign and declare that the U.S. economy has made a soft landing.
A soft landing means that the economy has moderately “receded” from periods of overheating and inflation, but has not contracted. Therefore, we should expect low inflation, positive economic growth, and a strong labor market. But how low does inflation have to go? How aggressive must economic growth be? What unemployment or other labor market data points to strength that warrants classification as a soft landing?
In short, there are a lot of variables to consider when officially declaring a soft landing. But for Infrastructure Capital Management’s Hatfield and BMO Wealth Management chief investment officer Yongyu Ma, they have also been predicting a soft landing for the economy since 2022, not to meet specific inflation or unemployment targets but to Maintain the overall health of the economy. . As long as inflation continues to return to the Fed’s 2% target, unemployment does not surge, and GDP growth remains positive, that is a soft landing.
When asked to provide some more specific figures, Ma said he would “estimate” some of the numbers he considered the most important, which were related to the labor market. “If over the next several quarters we have an unemployment rate of 4% or lower, and if jobless claims stay below 300,000, even if the economy slows to near zero, I think that’s At least it’s a good sign that we’re actually getting a soft landing,” he said.
Still, both Hatfield and Ma believe a soft landing won’t officially occur until the Fed ends its rate hikes and the economy is still growing.
“I don’t think you can declare victory until the Fed starts cutting interest rates,” Ma said. wealthnoted that at some point in the next few quarters if inflation subsides and unemployment remains low, “a soft landing could happen in real time, but you can’t really put a stamp on it and say, ‘Look, we’ve achieved that. This goal,’ until then.”
Ma added that while he expected the economy to slow throughout the year, the labor market should remain strong enough to achieve a soft landing. But what about inflation? A soft landing isn’t possible without stable consumer prices, and the latest inflation data isn’t encouraging – at least on the surface.
Is inflation still a problem?
The U.S. Bureau of Labor Statistics reported Wednesday that consumer prices rose 3.7% last month from a year earlier, up from 3.2% in July. But that’s what economists call “headline inflation,” a different measure called “core inflation” that excludes more volatile food and energy prices and is monitored more closely by the Federal Reserve , fell to 4.3% from 4.7%, indicating that economic pressure on underlying prices is easing. More than half of the rise in headline inflation in August was due to a roughly 10% rise in gasoline prices due to OPEC oil production cuts.
Still, the latest inflation report strengthened the resolve of some of the most pessimistic economic forecasters.Former Treasury Secretary Lawrence Summers said Bloomberg On Wednesday, the latest data showed “no sign” that inflation will return to the Fed’s 2% target.
“I think we are still facing a difficult situation to deal with,” he warned. “We all hope for the best outcome, but at this time there are no guarantees [soft landing] can be realised. “
The Harvard professor suggested in “Groundhog Day” that, echoing JPMorgan Chase CEO Jamie Dimon’s June 2022 forecast, there are three possibilities for the U.S. economy, each Sex has about a 1/3 chance of becoming a reality. First, there could be a soft landing, in which inflation falls back to the Fed’s target without a surge in unemployment and a decline in gross domestic product. Second, there could be a “no landing” scenario, where inflation remains above 3% as the economy overheats. Third, there could be a hard landing, in which the Fed raises interest rates and ultimately triggers a job-killing recession.
“The aircraft is still well above the landing point. It is still moving very fast, and from here it is very unclear whether it will hit the ground hard and whether it will overshoot.” Summers concluded, continuing to use the aircraft to Metaphorical economy.
Citi economists, led by Chief Economist Nathan Sheets, also warned in Tuesday’s report that aggressive rate hikes have historically led to recessions, and they did not believe this was an exception. .
“Our view is that the laws of ‘economic gravity’ seen in previous cycles will eventually reassert themselves and the U.S. economy will face a recession in 2024,” they wrote. “Advancing a soft landing requires a compelling narrative to explain why.’ This time is different’.”
Is the economy still headed for a soft landing?
While it may be too early to declare a soft landing victory, the resilience of the U.S. economy over the past few years has certainly surprised many of the world’s best minds. Top investment banks from Wells Fargo to Bank of America have been forced to revise their recession forecasts amid generally optimistic data for 2023. Bank of Montreal’s Ma and Infrastructure Capital Management’s Hatfield remain confident the economy is on track for a soft landing.
Despite the Fed’s sharp interest rate hikes, Hatfield said he expects inflation to subside, the labor market to remain resilient and GDP growth to remain between 1% and 2% for three key reasons.
First, the housing shortage should prevent construction unemployment from falling significantly.Jeffrey Mezger, CEO of KB Home, one of the largest homebuilders in the United States, said wealth Earlier this month, in a normal U.S. real estate market, there would typically be six months’ worth of inventory available for sale, or about 2.6 million homes. Today, “there are 500,000 homes. Of those 500,000 listed houses, a large proportion of them are not even habitable and have to be acquired, demolished and rebuilt,” he explains.
Metzger said this housing shortage coincides with “strong demographic demand from Millennials and Gen Z,” putting homebuilders in a good position to avoid layoffs even as the economy weakens.
Hatfield believes that homebuilders’ strength amid housing inventory problems has and will continue to help prevent unemployment from surging despite the Fed’s steep interest rate hikes, which typically wreak havoc on rate-sensitive industries like housing.
Second, Hatfield said the auto shortage will have a similar boost to employment in manufacturing. Automakers have been plagued by supply chain issues, chip shortages and, more recently, shutdowns for years, resulting in continued undersupply in the automotive market. Hatfield believes the shortage will allow manufacturers to continue producing new vehicles even as interest rates rise.
“Never in modern financial history have we experienced a downturn where investment fell sharply and construction and industrial employment fell sharply. So since that hasn’t happened yet and is unlikely to happen because of the shortage of cars and homes, we think the economy The probability of a recession is very low,” he explained.
Finally, Hatfield believes government stimulus in the form of infrastructure spending should also help prevent unemployment from rising. The Biden administration has passed the Infrastructure Investment and Jobs Act and the CHIPS and Science Act in the past few years in an effort to revitalize U.S. infrastructure and manufacturing.
“You can’t ignore government stimulus,” Hatfield said. “For the first time since the Great Recession, the federal government is actually spending money on countercyclical things.”
BMO’s Ma supports Hatfield’s view, but in his view, the main reason the economy has avoided recession so far is that the labor market has shown “unprecedented” strength due to years of labor shortages during the epidemic, which has made consumer spending Strong. Consumer spending accounts for about 70% of U.S. GDP.
“The strength of the labor market provides a very important buffer against an economic slowdown caused by rising interest rates or other recessions,” he said. “At the end of the day, if people have jobs and feel that their jobs are stable, then spending levels remain fairly stable.”