Is the US Economy Headed for a ‘Soft Landing’?

News Analysis

Several new reports have bolstered the narrative that the U.S. economy might be able to stick a so-called “soft landing,” referring to a scenario in which inflation falls back down to target while a recession is avoided and there’s no meaningful drop in employment.

The two reports—the Business Roundtable’s quarterly CEO economic outlook survey and the National Retail Federation’s (NRF) Monthly Economic Review—paint a picture of an economy that’s cooling but not necessarily falling into a recessionary deep freeze.

“Hard landing” fears were the prevailing narrative at the end of 2022 but those gave way to “soft landing” hopes in the new year before the banking sector turmoil and debt ceiling standoff prompted a fresh round of recession fears.

But as the crosswind from the debt ceiling crunch has eased, the “soft landing” narrative is again building steam, with some data points backing this view.

“The economy is more resilient than the market realizes,” BlackRock’s Chief Executive Larry Fink said last week, adding that he expects to see the Federal Reserve raise interest rates further in the face of stubbornly high inflation, but that he saw no “evidence that we’re going to have a hard landing.”

Down But Not Out

The Business Roundtable’s overall index of CEO expectations inched down by a modest three points from 79 last quarter to 76 in the second. While that’s below the historic average of 84, it’s still well above the 50 mark that is the dividing line between expansion and contraction.

And despite sharply lower enthusiasm among CEOs for new hiring, there was only a slight one-point increase in the share of executives who said they plan layoffs.

Six-month ahead capital expenditure plans saw a one-point increase, while sales expectations remained unchanged.

The data from the Business Roundtable’s CEO survey suggests that the economy is weakening but is not in free fall.

‘Looking Into a Kaleidoscope’

The NRF report painted a similarly nuanced picture of conflicting signs but no clear signal of a recession.

“Today’s economy is a lot like looking into a kaleidoscope, with the view changing and the data providing a different reflection of what’s happening every time you look,” NRF chief economist Jack Kleinhenz said in a statement.

For instance, while survey data shows consumer confidence is waning, actual spending data suggests that shoppers were fairly upbeat going into the second quarter and continued to spend.

“Consumer spending has been bolstered by a strong job market and rising wages, which have helped counter rising prices and higher borrowing costs,” Kleinhenz said. “While it’s difficult to reconcile these views, what we’ve learned over the last several years is don’t count the American consumer out—at least not yet.”

State-level economic data cited in the NFR report have increased over the past three months in every state except Alaska, with Kleinhenz saying this suggests “we are not in a recession.”

“We continue to look for a soft landing this year,” Kleinhenz added of NRF’s view of the U.S. economic outlook.

The narrative of a soft landing also got a boost from Treasury Secretary Janet Yellen, who said in a recent interview on CNBC that she continues to “see a path to bringing down inflation while maintaining a strong labor market.”

However, the view of a soft landing has been challenged by recent ISM manufacturing data, which showed that the U.S. manufacturing sector is already in a recession. The latest ISM manufacturing index fell to 46.9, which is the seventh consecutive month of sub-50 readings.

“The service sectors order books are weak and will need to turn around rapidly to prevent the service sector joining it,” wrote ING Chief International Economist James Knightley in a recent note.

Mixed Picture

America’s economy is strong amid robust consumer spending but some areas are slowing down, Yellen said Wednesday, adding that she expects unemployment to rise as the Fed continues to make progress in bringing inflation down closer to its 2 percent target.

She said that while banks may struggle with commercial real estate and face some consolidation as weaker institutions fail and get gobbled up by their stronger counterparts, there is enough liquidity in the system so the overall banking system be able to withstand any strain.

Yellen expressed the view that inflation can be brought down without taking the labor market with it. She predicted that the Fed’s rate hiking cycle would push unemployment to somewhere in the 4 percent range, up slightly from the 3.7 percent reading in May.

“We’ve always thought an unemployment rate with four as the first digit is a very strong labor market,” Yellen said. “Clearly, Americans feel good about their job prospects. They’re finding work quickly.”

Asked about former Richmond Federal Reserve President Jeffrey Lacker’s view that the federal funds rate will have to rise to 6 percent to tame inflation, Yellen expressed confidence that Fed policymakers would do what’s needed, while acknowledging a slowing economy.

“Consumer spending has continued to grow in a pretty robust way, but you’re also seeing areas of the economy that are slowing down,” Yellen said. “And this is a judgment that my former colleagues at the Fed are very capable of making. As I said, I think what’s important is to try to bring inflation down. That’s a top priority.”

The current federal funds rate is within a range of 5-5.25 percent.

US Economic Forecast Slashed

At the same time, the World Bank has slashed its 2024 economic growth forecast for the United States by half, predicting that the resilient U.S. consumer is about to weaken “substantially” and risks to the economic outlook abound.

The group’s latest Global Economic Prospects report predicts that, after growing 1.1 percent in 2023, the U.S. economy is set to decelerate to 0.8 percent in 2024.

In a previous version of the report in January, the World Bank expected the U.S. economy would grow by 1.6 percent in 2024, with the updated figures being half that pace.

The downgrade is mostly due to the lingering impact of the sharp rise in interest rates over the past year and a half as the Fed has struggled to ease price pressures.

The World Bank predicts that the peak impact on U.S. growth from high interest rates is expected to come at some point in 2023. At the same time, lagged effects of interest rate increases are expected to continue into next year and the economy in 2024 will likely be “weak.”

U.S. consumption, which the World Bank said has been “resilient” so far, is expected to slow down “substantially” as higher borrowing costs, tighter financial conditions, and depleted savings will weigh on household spending.

“Activity is expected to pick up toward the end of next year, as inflation eases and the effects of monetary policy tightening fade,” the World Bank said in the report.

In the United States, economic growth is expected to weaken “significantly” this year and into early 2024, the report indicates.

The Atlanta Fed’s latest GDP nowcast reading, published on June 7, suggests the economy is expanding in the second quarter at an annualized pace of 2.2 percent. remove

The U.S. economy grew by a paltry 1.1 percent in annual terms in the first quarter.