The Possibility of a Soft Landing in the US Economy is Rising
By The US economy is in a period of ‘soft landing’, where softening US price pressures allow the Federal Reserve to cut in an orderly manner. This is a far cry from fears of a ‘hard landing’ last October, where it looked like sticky inflation would force central bankers to hike into a recession.[0] However, the most recent US data set of powerful January jobs growth and much better service sector confidence questions whether we will see any kind of US landing at all.[0]
A soft landing, in economics, is a cyclical slowdown in economic growth that avoids a recession. A soft landing is the goal of a central bank when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation without causing a severe downturn.
Jerome Powell, the chair of the US Federal Reserve, suggested on February 1 that it is possible for the inflation rate to reach 2% without a drastic increase in unemployment, thus achieving a “soft landing”.[1] Last month's net employment gain of 517,000 coupled with a decrease in wages, brings the group of people who predicted a soft landing closer to being proven right in their forecast of avoiding a recession.[2] It is true that the job surge in January is just one data point.[2] It is even more remarkable that there has been a streak of ten monthly payroll reports that have surpassed expectations.[2] Job seekers benefit from that trend.[2]
There are multiple factors contributing to an increased probability of a soft landing. The January jobs report showed remarkable strength, indicating that the labor market is still very strong.[3] Our labor market forecast has been enhanced, and we now anticipate that employment will experience less significant decreases this year and in the following one.[3] It is now expected that the unemployment rate will reach its highest point, on average, in the first quarter of 2024 at 4.8%, a lower peak than was predicted earlier.[3]
Morgan Stanley has stated that the idea of a US economic soft landing this year has been widely accepted, and that a “no landing” scenario is similar to a soft landing, though it is not well defined.
When the Federal Reserve increases interest rates to combat inflation, a “hard landing” suggests the potential for a major recession in order to lower inflation, whereas a “soft landing” implies that inflation can be reduced without a significant recession or not even one at all.
0. “FX talking: Soft landing, hard landing, no landing?” FXStreet, 7 Feb. 2023, https://www.fxstreet.com/analysis/fx-talking-soft-landing-hard-landing-no-landing-202302071211
1. “Dallas Fed research casts doubt on ‘soft landing’” Central Banking, 9 Feb. 2023, https://www.centralbanking.com/central-banks/economics/macroeconomics/7954451/dallas-fed-research-casts-doubt-on-soft-landing
2. “‘Soft Landing' Crowd One Big Step Closer to Winning the Battle” Investing.com, 6 Feb. 2023, https://www.investing.com/analysis/soft-landing-crowd-one-big-step-closer-to-winning-the-battle-200635035
3. “Recession still likely, but odds of soft landing rising” FXStreet, 8 Feb. 2023, https://www.fxstreet.com/analysis/recession-still-likely-but-odds-of-soft-landing-rising-202302081108
