Economists Wonder Whether There Might Be a Soft Landing After All

Article originally posted on Globe St. on July 18, 2023

The economic soft landing that so many were looking for is still at play, according to many economists and the expectations of markets. Great if it happens, but it’s unclear whether the Federal Reserve, in its oft mentioned role of “the chaperone who has ordered the punch bowl removed just when the party was really warming up,” will agree to lay a bed of downy pillows or some hardened old oak planks as the runway.

Of late there has been encouraging news. The Consumer Price Index report for June was exceedingly good on the surface compared to the past year. Seasonally adjusted inflation was 0.2% in June and 3.0% year over year.

Also, consumer sentiment rose for the second straight month, soaring 13% above June and reaching its most favorable reading since September 2021, according to the University of Michigan’s most recent consumer survey. “All components of the index improved considerably, led by a 19% surge in long-term business conditions and 16% increase in short-run business conditions. Overall, sentiment climbed for all demographic groups except for lower-income consumers.” The university attributed the rise in sentiment to slowing inflation and increased labor market stability.

In its July economic forecasting survey of almost 70 highly placed economists, the Wall Street Journal found an expected 54% probability of a recession in the next 12 months and unemployment of 4.3% by the end of 2023. Separately, Goldman Sachs has reduced to 20% its estimate that a U.S. recession will happen in the next twelve months, down from 25% in an earlier forecast.

Markets are quivering at the thought that maybe the elusive soft landing sought by the Federal Reserve might come true, as the Wall Street Journal reported. However, markets often assume the Fed will provide the actions they favor. This is not close to a guarantee. As experts have been telling GlobeSt.com over the last couple of years, markets should start to consider that when the Fed says it will take a line of action, there’s an exceptionally good chance that it will. Like when it said it would keep driving up interest rates.

Remember, the Fed has wanted to see consistent and ongoing progress in inflation reduction that they could expect to continue. One of the issues that Gregory Daco, EY-Parthenon chief economist, pointed out on Twitter that the “free lunch is over.”

Inflation comprises many sectors. Some of them have come down sharply and can have an outward effect on overall inflation. For example, in the month-over-month seasonally adjusted inflation, new cars were down 0.5%. Airfares had dropped 0.8%. Daco wrote that “now momentum will have to come from slower core services price momentum,” and these are the stickier parts of pricing.

“The headline is CPI inflation fell to 3.0%. But mostly this is the huge June 2022 # dropping out & what is almost certainly a transitory 17% fall in energy prices over the last yr,” economist Jason Furman agreed in his own tweet.

The Fed still almost certainly plans a rate increase this month and another later in the year, as Chair Jerome Powell has said.

And as Harvard’s Lawrence Summers and Alex Domash wrote in March 2022, “Historically, when average quarterly inflation rises above 5 percent, the probability of a recession over the next two years is above 60 percent, and when the unemployment rate drops below 4 percent, the probability of a recession over the next two years approaches 70 percent. Since 1955, there has never been a quarter with average inflation above 4 percent and unemployment below 5 percent that was not followed by a recession within the next two years.”

The country will see, but that two-year timeline isn’t up.