Is U.S. Economy Descending To A Soft Landing?

From the end of last year, there was always fear of recession. Many economists, analysts and experts even stated that the second half of this year may face a recession. However, there are very few economists who said the economy may have a soft landing rather than a recession. This article endeavors to dissect and analyze the nuanced journey of the U.S. economy, scrutinizing indicators, policy decisions, and external factors that collectively shape its trajectory. From the Federal Reserve’s strategic maneuvers to the intricacies of the Consumer Price Index, we embark on a comprehensive exploration to answer a critical question: Is U.S. Economy Descending to a Soft Landing? 

Introduction

In the ever-shifting landscape of global economics, the United States stands at a pivotal crossroads. The specter of a recession, ominously looming just a year ago, has given way to discussions of a potential soft landing.Amidst conflicting forecasts and a myriad of economic variables, our analysis aims to provide clarity on the current state of the U.S. economy. We delve into the meaning of a soft landing in economic terms, unravel the Federal Reserve’s actions, scrutinize the U.S. Consumer Price Index, and ultimately seek to decipher whether the nation’s economic descent is steering toward a gentle and controlled landing or facing the precipice of recession.

Definition or Meaning of Soft Landing and Fed’s Action

Many may wonder what is meant by a soft landing, which many of us have been hearing from last year. In Economics, the soft landing is mentioned when a Central Bank is trying to slow the demand of the economy as well as to control inflation but also ensure that it does not lead to recession and increase in unemployment. 

The Federal Reserve from last year has been raising interest rates (11 times so far, with a pause last time) to control inflation and slow down the demand of the economy. However, it was cautious enough to look into unemployment data and ensured it didn’t rise in a big way. At present inflation is falling and economic output (i.e. GDP) still growing – this means that the Fed can pull off the feat which many thought was impossible.

U. S. Consumer Price Index

On October 12^th, 2023, the U.S. Bureau of Labor Statistics released the Consumer Price Index for All Urban Consumers (CPI-U) unchanged on a seasonally adjusted basis after increasing 0.4 percent in September. 

For the past 12 months, the all-item index increased by 3.2 percent before seasonal adjustment. In October, there was a rise in the index for shelter which was balanced by a decline in the gasoline index. This resulted in an unchanged seasonally adjusted index over the month. The energy index fell by 2.5 percent as a 5.0 percent decline in the gasoline index has balanced more than the increase in other energy component indexes. 

In October, the food index increased by 0.3 percent compared to an increase of 0.2 percent in September. 

The Core inflation index (i.e. index for all items minus food & energy) rose by 0.2 percent in October compared to an increase of 0.3 percent in September. 

Year-on-Year (YoY) for all Items index increased by 3.2 percent ending October; this is a marginal increase from than 3.7 percent (YoY basis) increase ending in September. For Core Index (i.e. all items minus food and energy) increased by 4.0 percent over the past 12 months, its minimum change since September 2021. The energy index declined by 4.5 percent for the 12 months ending October and the Food index increased by 3.3 percent over the last year.

Present Outlook of the Economy 

The U.S. Economy has made substantial advancements towards soft landing – thanks to much stronger GDP growth than expected. The great surprise is that the strong GDP has not affected the labour market or inflation to fall. The monetary and fiscal tightening has paved the way for a soft landing along with a very low chance or probability of recession (say approx.. 15-20 percent). 

As we have seen above CPI inflation is more or less stable; the Producer Price Index (PPI) fell by 0.5 percent in October (seasonally adjusted)  compared to an increase of 0.4 percent in September. Even the PPI core index (i.e. excluding food and energy) has eased from 5.5 percent in October 2022, to 2.9 percent in October 2023 (Change in final demand less foods, energy, and trade). 

Overall, the CPI and Core inflation have fallen from their peak during the pandemic. The final descent is expected to happen in 2024. Even the Fed’s preferred gauge of inflation Personal Consumption Expenditures (PCE) has been unchanged for the past three months. 

Our Perspective/Conclusion

If Consumer spending remains stronger (at least intact if not increasing more) along with the Job market as well as inflation then the U.S. economy may have a soft landing. But, the U.S. growth story is not as easy as it seems to be. This may raise some questions for many – when everything is going smooth as of now what is the problem? 

Well, we reiterate that there is always a time lag for any policy decisions that have been made/taken. The Federal Reserve has hiked interest rates 11 times already. The impact of these hikes has to be seen before we can see where the economy is heading to. Also, we cannot ignore looming the U.S. Debt Surges and fiscal deficit. 

There are other risks which can impact the U.S. growth story. They are geopolitical conflicts like the Ukraine-Israel War and the risk of a spike in oil prices. Therefore, it is too early to celebrate or say that the U.S. economy is going to descend a soft landing. 

In conclusion, while the U.S. economy appears to be on the path to a soft landing, celebration must be tempered with prudence. The year 2024 holds the promise of a final descent towards stability, yet uncertainties persist. 

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