The Possibility of a Soft Landing in the US Economy is Rising
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. 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.
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”. 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. It is true that the job surge in January is just one data point. It is even more remarkable that there has been a streak of ten monthly payroll reports that have surpassed expectations. Job seekers benefit from that trend.
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. 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. 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.
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
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