With inflation cooling and hiring remaining strong, economists now venture that something other than a recession may be around the corner: a so-called soft landing.
That’s quite a turnaround from earlier this year. Economists in February werethat the US was slipping into a recession – thanks to the Federal Reserve’s 11 rate hikes since early 2022 and signs that inflation-weary businesses and consumers may be pulling back on spending.
But so far, the economy has continued to plow ahead, and inflation is receding faster than some economists had expected. Some types of products are even visibleor a drop in prices compared to a year ago. The Federal Reserve sounded cautiously optimistic Wednesday, with Chairman Jerome Powell saying he was “pleased with the progress” in the fight against inflation and the Fed’s goal of maintaining full employment.
“I’ve always felt since the beginning that because of the unusual situation there was an opportunity for the economy to cool in a way that allowed inflation to come down without the kind of massive job losses that often have been associated with high inflation and tightening cycles,” Powell said Wednesday.
This year, the U.S. economy has produced a rare confluence of trends, as inflation has cooled significantly while the economy has continued to grow — something that “many economists thought would be impossible,” noted Brian Rose, senior U.S. economist at UBS Global Wealth Management in a research note from Monday.
“We maintain our view that the economy is headed for a soft landing,” he added.
Here’s what you need to know about a soft landing.
What is a soft landing?
A soft landing is “the equivalent of ‘Goldilocks’ porridge’ for central bankers: after a tightening, the economy is just right – neither too hot (inflationary) nor too cold (in a recession)” noticed Sam Boocker and David Wessel of the Brookings Institution.
But they noted that there is no official definition of a soft landing, and the National Bureau of Economic Research (NBER), which determines when the U.S. is in an official recession, does not outline the requirements for a soft landing — or a hard landing for for that matter.
How is it 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 is spread throughout the economy and lasts more than a few months.”
Generally, recessions include a decrease 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, unemployment may rise, but the increase would be far from the extremes seen in the Great Recession, when unemployment jumped from 5% to 10%.
Right now, the Fed predicts that the unemployment rate will rise to 4.1% for 2024 and 2025, slightly higher than the current rate of 3.7%.
It also marks a retreat from the Fed’s 2022 unemployment projection, resulting in an additional 1.2 million people losing their jobs. But so far, companies have been reluctant to lay off workers because of a tight labor market that has made it harder to retain 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 the current level of 3.1%. And it could help consumers raise their living standards as employers say they will boostnext year.
For its part, the Fed predicts that inflation as measured by the PCE index will fall to 2.4% next year. On Wednesday, the central bank held off on raising interest rates, while also predicting three rate cuts in 2024.
“[I]nflation has surprised their projections to the downside, and that advance allows the Fed to consider lifting its foot from the policy brakes earlier than expected,” TD Securities analysts noted in a Wednesday note.
Does that mean a recession is it not in the cards?
Of course, a recession is still possible. Powell emphasized in his comments Wednesday that while he is pleased with the economy’s progress, he is not declaring victory just yet.
“I think there’s always a probability that there will be a recession in the next year, and that’s a meaningful probability regardless of what the economy does,” Powell said.
Indeed, some economists still predict a recession, albeit later in 2024.
“PNC expects a decline in consumer spending in the second half of 2024 as the US 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 great, why do I feel like I’m falling behind?
Most Americans say their incomewith inflation. That leaves many feeling dissatisfied with the economy, even as unemployment remains low and the economy continues to grow.
Powell nodded to that question on Wednesday, saying that consumers are very sensitive to prices but that wages are catching up.
“People are still living with high prices and that’s something that people don’t like,” he said. “Real wages are now positive, so wages are now moving up more than inflation as inflation comes down, and that might help improve people’s mood.”