Duane R. from St. Louis, MO asks: Hey Mitch, I’ve been seeing some reports about the possibility of an “economic soft landing,” which seems like a pretty optimistic view of the current situation. Where is your thinking on this? Thank you.
Mitch’s Response:
Thanks for your question. Many economists are weighing in on this topic with widely varying opinions, ranging from economic catastrophe to no recession at all. I tend to lean towards the latter category, in thinking the economy will weather this period better than most expect.
To be clear, I’m not convinced the U.S. will avoid recession altogether. Leading economic indicators like the Conference Board’s LEI Index and the 10-year/3-month U.S. Treasury bond yield curve are pointing to weaker growth ahead. What has puzzled many economists, though, is the ongoing strength in the labor market. Job growth is still posting numbers above pre-pandemic levels, and a remarkable 30% of unemployed people find a new job each month. The situation can always change, but in my view, you can’t commit to the ‘economic catastrophe’ narrative when jobs are this plentiful.1
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The Fed’s projections for where rates will end up next year – which are again by no means set in stone – are also what I would consider to be fairly modest in historical terms and relative to current inflation. If the Fed expects the fed-funds benchmark rate to reach 4.6%, and core inflation by the Fed’s preferred gauge is currently 4.5%, then we end up with real (nominal rates adjusted for inflation) interest rates of 0%. Generally speaking, if the Fed wanted to quash demand and slow growth considerably, we would see real rates move firmly into positive territory.
The Federal Reserve still expects that other cyclical forces will help bring inflation down in addition to their rate hikes, like more labor-force participation and an easing of the issues impacting food and energy markets. A key part of any thesis that we will see a “soft landing” relies on these other factors bringing inflation down, which in turn would lower the risk that the Fed over-tightens and would increase the chances that the labor market holds up. There are many “ifs” in all of these scenarios, but I remain in the camp that the U.S. economy and consumers are more dynamic and resilient than currently appreciated.
There are other economic fundamentals that run counter to the economic catastrophe scenario, in my view. The Commerce Department reported last week that consumer spending rose 0.4% month-over-month in August, which was notably higher than the inflation prints over the same time frame. We’re also seeing relatively strong activity in industrial production and capital expenditures, which we would normally expect to be faltering in a weaker economy.
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