Is U.S. Economy Headed for “Soft Landing”?

Business Concept. On A White Surface, A Cup Of Coffee, A Pencil

On May 24th 2023, Morgan Stanley Research was predicting a soft landing for the US Economy even though they recognized then that many experts believed that due to higher interest rates and the squeeze on lending, a recession was inevitable.

Morgan bases its opinion on several factors, saying “To us, data points in housing, the labor market, income and spending trends, and inflation bolster a more optimistic outlook.”

Since the end of May, the basis for their optimism has only improved, i.e., July trends in the labor market, income and spending, and inflation reduction. Only housing is the sore spot and Morgan went on to say,in the above cited article, that the drag on the economy due to the housing market seemed to be bottoming out and that by the third quarter it would be a net neutral factor thus preventing a drag on growth from other sectors of the economy.

As we wrap up the first month of Q3 2023,what is the economic news now?

Some news is confirming what Morgan Stanley was predicting about what would be happening to the housing market by Q3.  The Washington Post reported on July 17th that the housing recession was already ending with supply chains opening up, builder confidence increasing and home prices slowly stabilizing.

In mid-July2023, Bloomberg News reported that Bank of America and Wells Fargo were predicting a “mild recession” in 2023.  Not as good as we would like to hear but “mild recession” is better that simply “recession”.

But, as recently as July 27, 2023 the Associated Press reported that there may be “no recession”, saying that “the most optimistic economists say they are hopeful that a recession can be avoided, even if the Fed keeps interest rates at a peak for months to come”. (My emphasis). And AP cited several reasons for that opinion much the same as Morgan Stanley cited at the very beginning of this article, i.e., significantly lower inflation, low unemployment, solid job creation, consumer spending strong, etc.

The AP article went on to say that the positive factors referred to above caused the Chief Economist at Goldman Sachs, Jan Hatzius, to lower his estimate of “the likelihood of a recession in the next 12 months from 35% to just 20%”.  I read that as an 80% chance that there will not be a recession in the next 12 months.

Finally, on the expert economic opinion side, the Associated Press turned to an exclusively “buy side” investment group, Renaissance Marco specializing(also exclusively) on macro research, i.e.“macro-economic research” etc.  Their opinion on the recession question as of the end of July2023 was, “The risk of recession is receding rapidly”.

So, it looks good for either no recession at all or a “mild recession”. Such a recession would, almost by definition, be short-lived and without a great deal of damage to the overall economy.

Also, the Fed chairman, Jerome Powell, said in his comments on the .25-pointrise in interest rates announced on July 19 and effective July 26th that he was encouraged by the good news in the US economy and would try to finish his work on inflation reduction while trying to avoid a recession.  That was good news as well.

I took him to mean that he now thinks that is possible and will keep that outcome as more of a goal than he had in the beginning of his campaign to reduce inflation to 2% (now just 3%).  I believe when he began, he was clearly thinking of a recession but that would be better than the ongoing inflation, i.e. his ambiguous talk about the coming “pain” that was unavoidable.

What no one can predict are the “known unknowns”(Thank you Donald Rumsfeld) including the effects of the already taken actions of the Fed on interest rates. But more than their actions, which many economists believe ended with this last July increase (See Reuters recent survey of 106 economists), I am thinking of other kinds of events that could tip the scales in a negative direction. Events like a negative outcome in Russia’s war on Ukraine, a Middle East war, negative events in China, North Korea or Taiwan, growing recessions in other countries, serious negative political events in our own country, etc.

Although it is a truism that the future is always unknown, we are certainly not without the ability to influence these possible negative happenings for the good of our country and our interconnected world.

As always, Stay Safe and continue to pray for Ukraine!