WASHINGTON / NEW YORK
Estimates for a soft landing in the US economy are rising as data signaling slowing inflation and continuing growth contribute to these expectations.
Whether the Fed will end its fight against inflationary pressures with a soft or hard landing in unclear, with recent data point to a soft landing scenario, though geopolitical tensions and the Nov. 3 presidential elections – just two weeks away – risk disrupting the scenario.
A soft landing in economics can be likened to a gradual and damage-free descent of an airplane, as it is the economy’s monetary policy tightening and its consequential and potential impact on the economy, though the term lacks an official definition.
A soft landing can refer to the cooling of an overheated economy, a cooling that does not cause 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 also bring a large rise 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 Fed chairman and raised the interest rate above 19% from July 1980 to January 1981 to fight inflation, which was at 11% annually at the time, leading to a deep recession for 16 months, with unemployment touching 10.8%.
By mid-1983, however, Volcker had brought inflation down to around 3% via a hard landing.
As for a soft landing example, during the monetary tightening under Fed Chairman Alan Greenspan in February 1994, US unemployment dropped from 7.8% to 6.6% while inflation was at 2.8% and interest rates were around 3%. The Fed then decided to raise interest rates preemptively due to concerns regarding 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 next year, one of the Fed’s “proudest” achievements, as Greenspan wrote in his memoirs.
Soft landing’s top indicator: Unemployment
Economists monitor the strength of the labor market to assess the likelihood of a soft landing after rate hikes by the Fed, and the number one indicator they follow is the unemployment rate – whether the Fed can avoid a recession while reducing inflation is determined by looking at data regarding labor force participation, average hours worked, and more.
Real GDP growth is another indicator, as it signals whether the economy is in recession.
US unemployment remains below 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 the recovery efforts bore fruit. From 6% in May 2021, it only improved.
The labor market continued to maintain its strength despite the Fed’s monetary tightening decisions in March 2022 to cool the overheated economy, which began while interest rates touched 23-year highs.
After March 2024, the unemployment rate reached a nearly three-year high of 4.3% in July, and despite it reaching the highest level in the last few years, it remained below historical averages.
The lower-than-expected employment growth triggered recession concerns, and the Fed started easing its monetary policy by cutting its 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 not losing momentum
The US economy lost momentum after the Fed’s tightening decisions in 2020 when the pandemic started during the global economic crisis, and the country’s economy shrank 2.2%, though it grew 6.1% the next year.
Economic growth slowed down to 2.5% in 2022 due to the Fed’s rate hikes, and it was at 2.9% last year.
In the first quarter of 2024, US economic growth was at 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, though the bank’s fight with inflation is far from over.
Following the easing of restrictions during the pandemic, supply chain disruptions and significant fiscal and monetary incentives, as well as inflation in the country started to rise in 2021.
In June 2022, the US annual inflation reached 9%, the highest level since 1981, and it slowed down via the Fed’s tightening of monetary policy from March 2022 to September.
As of September, US inflation is at 2.4% on an annual basis.
Balance sheets support soft landing expectations
In the second week of October, balance sheets in the US started being released with the announcement of financial results of major banks, increasing soft landing estimates.
The net profit of Goldman Sachs and Goldman Stanley increased year-on-year in the third quarter, and the profits of JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup came in above expectations, though with declines.
JPMorgan Chase executives said that the bank’s balance sheet signaled that the US economy remains strong for customers and large corporations, in line with a soft landing’s requirements, while Goldman Sachs executives said the start of the rate-cut cycle would boost economic activity and contribute to a soft landing.
Some analysts said that uncertainties, such as the geopolitical tensions in the Middle East and the result of the US presidential elections just around the corner, could very well disrupt this optimism.
*Writing by Emir Yildirim
