Estimates of a “soft landing” in the US economy are on the rise

WASHINGTON / NEW YORK

Estimates of a soft landing for the US economy are rising as data indicating slowing inflation and continued growth contribute to those expectations.

It is unclear whether the Fed will end its fight against inflationary pressures with a soft or hard landing, with recent data pointing to a soft landing scenario, although geopolitical tensions and the Nov. 3 presidential election, in just two weeks, they risk disrupting the scene.

A soft landing in the economy can be compared to the gradual and undamaged descent of an airplane, as it is the tightening of monetary policy in the economy and its consequential and potential impact on the economy, although the term has no official definition.

A soft landing can refer to the cooling of an overheated economy, a cooling that does not lead to a recession by using monetary policy to keep inflation under control.

A soft landing is achieved when a central bank raises interest rates to fight inflation, but does not result in a large increase in unemployment or a slowdown in its country’s gross domestic product (GDP).

A hard landing is when these decisions result in recession and high unemployment.

In 1979, Paul Volcker became chairman of the Fed and raised interest rates above 19% from July 1980 to January 1981 to fight inflation, which was 11% per year at the time moment, which caused a deep recession for 16 months, with unemployment reaching 10.8%.

By mid-1983, however, Volcker had reduced inflation to about 3% by landing hard.

As for an example of a soft landing, during monetary tightening under Fed Chairman Alan Greenspan in February 1994, US unemployment fell from 7.8% to 6.6%, while inflation was 2.8% and interest rates were around 3%. The Fed then decided to raise interest rates preemptively because of concerns about the possibility of rising inflation while the economy was growing.

The bank then raised interest rates from 3% to 6% in 1994 and cut them the following year, one of the Fed’s “proudest” achievements, as Greenspan wrote in his memoirs.

The main indicator of the soft landing: unemployment

Economists monitor the strength of the labor market to gauge the likelihood of a soft landing after the Fed’s rate hikes, and the number one indicator they track is the unemployment rate — whether the Fed can avoid a recession while reducing inflation is determined by looking at data on labor force participation, average hours worked, and more.

Real GDP growth is another indicator, as it indicates whether the economy is in recession.

Unemployment in the United States remains below the historical average

The US unemployment rate hit its highest level since the Great Depression at 14.8% in April 2020 due to the impact of lockdowns and layoffs during the COVID-19 pandemic.

The unemployment rate gradually fell as the economy returned to normal and recovery efforts paid off. From 6% in May 2021, it only got better.

The labor market continued to hold its strength despite the Fed’s monetary tightening decisions in March 2022 to cool the overheated economy, which began as interest rates hit 23-year highs.

After March 2024, the unemployment rate hit a nearly three-year high of 4.3% in July, and despite reaching the highest level in recent years, remained below historical averages.

Lower-than-expected job growth sparked recession worries and the Fed began easing monetary policy by cutting interest rates by 50 basis points in September.

The unemployment rate fell to 4.1% in September, according to the latest labor statistics.

Economic growth does not lose momentum

The US economy lost momentum after the Fed’s tightening decisions in 2020, when the pandemic began during the global economic crisis, and the country’s economy contracted by 2.2%, despite which grew by 6.1% the following year.

Economic growth slowed to 2.5% in 2022 due to Fed rate hikes, up from 2.9% last year.

In the first quarter of 2024, US economic growth was 1.6% and this figure rose to 3% in the second quarter.

Meanwhile, the Fed cut its policy rate in September for the first time since the pandemic, although the bank’s fight with inflation is far from over.

After the easing of restrictions during the pandemic, supply chain disruptions and significant fiscal and monetary incentives, as well as inflation in the country began to rise in 2021.

In June 2022, annual US inflation reached 9%, the highest level since 1981, and slowed thanks to the Fed’s tightening of monetary policy from March 2022 to September.

In September, US inflation stood at 2.4% annually.

Balance sheets support soft landing expectations

In the second week of October, US balance sheets began to come out with the announcement of the financial results of the major banks, increasing estimates of a soft landing.

Net income at Goldman Sachs and Goldman Stanley rose year-on-year in the third quarter, and profits at JPMorgan Chase, Wells Fargo, Bank of America and Citigroup beat expectations, albeit with declines.

JPMorgan Chase executives said the bank’s balance sheet indicated the U.S. economy remains strong for clients and large corporations, consistent with the requirements for a soft landing, while Goldman Sachs executives say that the start of the cycle of rate cuts would boost economic activity and contribute to a soft landing.

Some analysts said that uncertainties, such as geopolitical tensions in the Middle East and the outcome of the US presidential election around the corner, could well alter that optimism.

*Written by Emir Yildirim

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