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CNN
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The case for a US recession is fading as inflation eases and the economy remains remarkably resilient, despite 11 interest rate hikes since the Federal Reserve began its latest fight against inflation in March 2022.
In fact, Bank of America was the first major Wall Street bank to recently rescind its recession forecast week, entry into the Fed Economists, who also no longer expect a recession.
Controlling inflation without throwing the economy into recession has been dubbed a “soft landing,” something the Fed has only managed once in the last 60 years, although some research shows the central bank has done so more frequently. But aside from the fact that you can easily avoid a recession, it’s not clear what the economy would look like if there were a soft landing.
What would economic growth and the labor market look like? And who’s to say that the Fed has officially defied all odds and achieved a soft landing, anyway?
The main aspect of a soft landingAccording to economists, that’s the absence of a recession, as noted by the National Bureau of Economic Research (NBER). That means gross domestic product — the broadest measure of economic output — can’t contract for more than a few months at most for a while. This is a key data point that NBER takes into account when forecasting a recession, in addition to employment, household income and industrial production.
And with consumer spending accounting for about two-thirds of US economic output, a dramatic fall in consumer spending would inevitably weigh on GDP. So spending and economic growth typically go hand in hand.
“We would like consumer spending to remain strong to support overall GDP growth and business investment, and so far we have implemented those measures to some extent, albeit at a slower pace,” said Kayla Bruun. senior economist at Morning Consult. “I’m looking for the NBER to determine whether or not the US has officially entered a recession, which we may not know until several months or maybe even a year later, so we don’t know if we’ve had one until then.” soft landing.”
But with economic growth, as measured by gross domestic product, averaging more than 2% on an annualized basis in the first two quarters of the year, the US economy is still on strong footing. In fact, the Atlanta Fed’s real-time GDPNow tracker puts annualized GDP growth at a staggering 3.9% in the third quarter. With Q3 already underway, the US economy would need to deteriorate sharply in the coming weeks to trigger a recession, which is highly unlikely.
For a soft landing, the job market must remain intact. That means there should be low unemployment and strong (but not too strong) employment growth.
“In layman’s terms, 4% unemployment is kind of a magic dividing line, because when unemployment is below 4%, a whole bunch of things happen in the economy,” said Julia Pollak, chief economist at ZipRecruiter. “With unemployment below 4%, we see participation (in the labor market) increasing because the labor market is so tight that employers are increasing wages, improving benefits, improving working conditions and hiring more widely,” Pollak said, a Soft landing labor market would be similar to that between 2015 and 2019.
The unemployment rate fell to 3.5% in July, according to the Labor Department’s jobs report on Friday. Before the pandemic, the unemployment rate hit 3.5% in February 2020, a half-century low.
The other key feature of a soft landing is that the Fed can successfully control inflation. but that leaves room for interpretation. Some say that simply means that inflation falls to 2%, which is the Fed’s official target. Others say inflation could settle at just over 2%.
“I don’t think 2% is necessarily a key threshold because I think the Fed would be more than happy to see 3% as long as inflation falls,” said Josh Markman, partner at Bel Air Investment Advisors.
It’s unclear how widespread Markman’s sentiment is among investors. And it’s possible that the Fed will raise its inflation target, but most economists think that’s unlikely. The conventional wisdom is that the Fed doesn’t want inflation to stay above 2% for too long because then consumers might expect ever higher prices and herald a new era of faster inflation. The Fed is still contemplating a final rate hike this year, even though the Fed’s favorite indicator of inflation — the Personal Consumption Price Index — rose 3% year-on-year in June.
So who will determine if the Fed has landed softly? It is the NBER and the Fed that would both make the decision.
At some point, the central bank would have to acknowledge that inflation is within target – be it the current 2% target or a new one – and begin to focus equally on its other mandate of keeping the labor market buoyant and sustainable. That would be a win.
Top Federal Reserve officials welcomed the July job market slowdown, even as wages rose more sharply.
The Department of Labor jobs report was released on On Friday, average hourly wages showed a whopping 4.4% year-on-year increase in July, which some analysts called a nagging problem for the Fed.
But not so much with Federal Reserve Bank of Chicago President Austan Goolsbee.
Wages “are not a leading indicator of price inflation,” Goolsbee said in an interview with Bloomberg. “I think if you want to know if you’re beating inflation, look at inflation.”
Atlanta Fed President Raphael Bostic expressed a similar sentiment, adding that he was pleased with the economy’s steady slowdown.
“It doesn’t surprise me that wages are still high,” he told Bloomberg. “Throughout this period of hyperinflation, workers’ wages have been lagging inflation for quite a while, so we’re still in that catch-up phase and I expect to see wages continue to be high.”
Wages have contributed to inflation, but the extent is debated by economists. The Fed is also putting more weight on the quarterly employment cost index, which showed wage growth slowed in the second quarter.
Monday: Revenue from Tyson Foods and Beyond Meat. Federal Reserve officials Michelle Bowman and Patrick Harker deliver their remarks. The Federal Reserve releases June consumer credit figures.
Tuesday: Results from UPS, Lyft, Under Armour, Fox and Restaurant Brands. The National Federation of Independent Business in the US releases its Small Business Optimism Index for July. The US Department of Commerce releases June figures on imports and exports. China’s National Bureau of Statistics releases inflation data for July.
Wednesday: Revenue from Disney and Wendy’s.
Thursday: Earnings from Ralph Lauren. The US Department of Labor releases its July consumer price index along with weekly data on worker claims for unemployment benefits.
Friday: The US Department of Labor releases its July Producer Price Index. The UK Office for National Statistics releases gross domestic product data for the second quarter. The University of Michigan releases a preliminary assessment of consumer sentiment for August.
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