U.S. Economy Heading for a Soft Landing

Numerous forecasters, experts, as well as economists have been predicting a recession for more than 1 year now. While the world is lowering inflation to avoid serious recession, the United States stands out by showing strong resilience towards it. In this article, we are going to see the advanced estimates of GDP for the fourth quarter and year 2023, followed by the GDP projection of the IMF and OECD as well as how the U.S. Economy heading for a Soft landing and the Factors attributed for soft landing. Let’s get started. 

Gross Domestic Product (GDP), Fourth Quarter and Year 2023 (Advance Estimate)

On 24^th January 2023, the Bureau of Economic Analysis released its advanced estimates of GDP for the Fourth Quarter and for the year 2023.

According to the “Advance” estimate released by the Bureau of Economic Analysis, “Real gross domestic product (GDP) increased at an annual rate of 3.3 percent in the fourth quarter of 2023. In the third quarter, real GDP increased 4.9 percent.”

Source: U.S. Bureau of Economic Analysis

In terms of annual level growth, Real GDP increased by 2.5 percent in 2023 against 1.9 percent in 2022 (in comparison with the 2022 annual level). This increase in real GDP is mainly attributed to consumer spending, non-residential fixed investment, state and local government spending, exports and federal government spending. These increases were partly offset by the decline in residential fixed investment and private inventory investment. Imports decreased in 2023. 

The resilience of the economy is overwhelming and surprises the policymakers and the multilateral organizations like IMF, World Bank, OECD etc… Before going to factors attributed to this resilience of the economy let us see projections as well as what IMF and the Organization for Economic Co-operation and Development (OECD) have to say about the U.S. Economy.

Growth Projections by IMF and OECD

On 30^th January 2024, the IMF released its World Economic Outlook Update. In that report, the IMF projected the growth to fall from 2.5 percent in 2023 to 2.1 percent in 2024 and 1.7 percent in 2025. The reason it provides for downgrading the growth rate is because of the lagged effects of monetary policy tightening, gradual fiscal tightening, and a softening in labour markets slowing aggregate demand. 

If one looks at the data closely, in October 2023, IMF projected 2.1 percent growth for 2023, 1.5 percent for 2024; however, in the current/ latest update this has changed and now the growth rate for 2023 stands at 2.5 percent (an upward revision) and for 2024 it is 2.1 percent (which is 0.6 percent higher than October 2023). IMF stated that the revision is made by taking into account of statistical carryover effects from strong-than-expected growth outcomes for 2023. 

According to the OECD Economic Outlook, the United States is projected, with annual GDP growth of 2.1 percent in 2024 and 1.7 percent in 2025. It also said that the growth is to remain supported by household spending and strong labour market conditions. Lower inflation will strengthen real wages and allow policy interest rates to come down, according to the OECD Economic Outlook.

U.S. Economy Heading for a Soft Landing

In 2021 and 2022, inflation started increasing till it reached its peak of 9.1 percent in May 2022. This rise in prices is because of the pandemic, which affected the supply chain, followed by oil and food price rises because of the Russia-Ukraine war. Many economies around the world are witnessing seeing receding in inflation. This is happening without recession, as numerous economists/forecasters expected as Central Banks increased interest rates to control inflation. 

In a recent Speech Federal Reserve chair, Jerome Powell reiterated the same by stating that: 

“After running below 2 percent for over a decade, inflation increased sharply in 2021, in the United States and in many other countries around the world.” Further, he said that “Inflation has declined to 3 percent over the 12 months ending in October, but after factoring out energy and food prices, which tend to be volatile, what we call “core” inflation is still 3.5 percent, well above our 2 percent objective.”

What surprised the forecasters from the International Monetary Fund (IMF) to the Federal Reserve is the remarkable resilience shown by the U.S. Economy. 

Both the IMF and OECD have stated that the Resilience of the U.S. Economy is amazing. The revision of the GDP growth by multilateral organizations, Fourth Quarter GDP and Job growth data are all showing that the U.S. Economy is heading towards a soft landing.

Factors Attributed to Resilience of the U.S. Economy

There are a few major factors which contributed to the Resilience of the Economy and they are as follows:

1. Fiscal Policy: 

The American Government spends a lot of money. According to IMF data, government expenditures as a share of overall output hovered around 35 percent in the years leading up to the pandemic. The response from the Government to address the coronavirus pandemic, in 2020 and 2021, with $5 trillion in relief and stimulus to people, businesses, institutions, and state and local governments—the Government expenditure has gone up and has jumped above 40 percent.  

Government spending has remained elevated as it has begun to make sweeping infrastructure and climate investments. By spending slowly, both by the states and households, the money has continued to trickle through the economy as a slow-release booster shot.

2. Consumer Spending:

Thanks to consumer spending–which is the biggest driver of the U.S. Economy. As per the fourth quarter report, Personal Spending grew at an annual pace of 1.9% – this is a modest slowdown from the previous quarter. Consumer spending was better, which fueled a better-than-expected labour market with rising wages and solid job growth.

3. Job Market:

On 2^nd February 2024 (Friday), the U.S. Bureau of Labor Statistics released the employment situation for January 2024 data. It was a blockbuster job report which showed that employers had added 353,000 jobs while the unemployment rate remained at 3.7 percent in January. According to the report, over the past 12 months, the average hourly earnings have increased by 4.5 percent. 

4. Inflation Easing.

According to the Advance Estimate of GDP for the fourth quarter and Year 2023, the Personal Consumption Expenditure (PCE) price increased by 1.7 percent in the fourth quarter compared with an increase of 2.6 percent in the third quarter of 2023. The Core prices increased by 2.0 percent in the last two quarters. 

It is to be remembered that the PCE core inflation is the Gauge inflation which the Federal Reserve looks out for in its policymaking. Therefore, the present data is reassuring to the Fed where it is widely expected to cut the interest rates later this year. 

Our Perspective/ Conclusion

The U.S. Economy is heading towards a soft landing as the data evidence shows. However, it is too early to say when the Federal Reserve will go for the long-awaited interest rate cut. The Fed will wait and watch the lagged effects before it goes for the interest rate cut. The Soft landing may be on the card but not without risks—the risks are premature loosening of policies and keeping the interest rate as it is for too long. Now, the Plane (economy) has to land smoothly and softly. 

In conclusion, while the U.S. economy showcases remarkable resilience, the path to a soft landing is not without risks. Examining fiscal policies, consumer spending, job market dynamics, and inflation trends provides a nuanced understanding of the economic landscape. The Federal Reserve’s cautious approach adds an element of anticipation, emphasizing the need for a smooth and calculated descent in these uncertain times.

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