The Truth About USA’s Soft Landing

This article will examine the truth about USA’s soft landing. Many experts, economists and even multilateral organizations have stated that the U.S. economy is heading for a Soft Landing. They stated based on various economic factors such as inflation, steady job growth, and resilience of the financial sector as indicators for a smooth landing. 

These are positive indications in the U.S. economy, but there are potential risks and challenges which can affect the soft landing. We will examine the major factors to see the truth about the USA’s soft landing. It is important to analyze whether the soft landing is true or a myth. Let’s get started. 

Consumer Price Index (CPI)—Inflation 

On 13^th February 2024, the U.S. Bureau of Labor Statistics reported the Consumer Price Index for All Urban Consumers (CPI-U) for January. The report shows that the CPI-U price increased by 0.3 percent in January on a seasonally adjusted basis, after rising by 0.2 percent in December. It also showed that the food price index increased by 0.4 percent in January; while the energy price index fell by 0.9 percent over the month, this is because of a decline in the gasoline index. 

Source: U.S. Bureau of Labor Statistics

The Core index (i.e. all items less food & energy) increased by 0.4 percent in January. Shelter, motor vehicle insurance, and medical care price index increased in January. 

According to the BLS report, over the last 12 months, inflation has increased by 3.1 percent before seasonal adjustment, for the all-item price index. This is a marginal 12-month increase in comparison with 3.4 percent during December 2023. 

Source: U.S. Bureau of Labor Statistics

The food price index rose by 2.6 percent while the energy price index decreased by 4.6 percent over the last year. The Core price index increased by 3.9 percent over the last year—the same increase as for the 12 months ending December 2023. 

What does Job Market data say?

In our previous article, we mentioned that “On 2nd 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.”

When one analyses the data closely, the employment level and the full-time employment have fluctuated for the past 6 months (see Table 1 and Graph below). The Full-time job market has been consistently declining for the past 3 months, though this may not be an alarming level for now. This is a worrisome factor for sure and we need to wait for the February data to be sure about the trend.

Source: U.S. Bureau of Labor Statistics 

Personal Income and Outlays, December 2023

According to estimates released on January 26, 2024, by the Bureau of Economic Analysis, both Personal Income (PI) and Disposable personal income (DPI = PI minus taxes) increased by 0.3 percent at a monthly rate in December 2023. The Personal Consumption Expenditure (PCE) has increased by 0.7 percent. The PCE price index and the Core PCE price index (i.e. PCE minus food & energy) have increased by 0.2 percent. Real PCE has increased by 0.5 percent. 

Source: U. S. Bureau of Economic Analysis

On a year-on-year basis, the PCE index increased by 2.6 percent for December 2o23. The Core PCE price index has increased by 2.9 percent in comparison with a year ago. Food Prices increased by 1.5 percent while energy prices decreased by 2.2 percent on YoY basis. 

Risks and Challenging Factors for Soft Landing

There are certain uncertainties, risks, and challenging factors which may affect the soft landing. They are as follows:

1. Job Market:

The resilience of the job market is highly an important factor for policymakers and for soft landing. The data shows that the Full-time job market is consistently declining for the past 3 months. Though it is a worrisome factor, when we see the data trend for a year, it shows a different picture. Therefore, we need to wait for the February data on employment to be sure about the trend. Based on this, policymakers make important decisions for the economy. 

2. Debt and Deficit:  

According to the U.S. Governmental Accounting Office (GAO), despite strong economic growth, the deficit for the fiscal year 2023 was $1.7 trillion—this is the fourth year in a row of a deficit above $1 trillion. 

The deficit comprises two parts – the primary deficit was about $1 trillion while net interest spending (i.e. primarily the cost to service the debt) was $659 billion in the fiscal year 2023. 

The GAO report also stated that at the end of fiscal year 2023, the $26.2 trillion in Debt held by the public. This is around 97 percent of GDP. 

GAO also stated that with the current revenue and spending policies, the debt held by the public will reach its historical high of 106 percent of GDP by 2028. GAO also projected that it may reach 200 percent of GDP by 2050 (i.e. over 30 years). 

GAO stated that a continuous increase in debt as a share of GDP is unsustainable. It may have direct and indirect implications on the economy, individuals and American households. 

3. Interest Rate:

One of the major factors which can affect the soft landing is interest rate. The interest rate cut is always on the cards this year—thanks to economic data which evidences resilience. However, the Federal Reserve has to wait and watch for the lagged effects of earlier its interest rate hikes, before going for expected rate cuts. The timing of the rate cut is important to ensure a soft landing without any crashes.

4. Inflation:

The Gauge Inflation of the Federal Reserve, i.e. PCE core inflation, is somewhat reassuring for the widely expected interest rate cut later this year. However, we believe that the Federal Reserve will wait till they witness the lagged effect of its earlier interest hike. Though the January data shows a marginal increase, it is a little lesser than December 2023.

5. International Trade: 

The trade pressures between the USA and its major trading partners, especially with China, also play a vital role in soft landing. Trade worries like the imposition of tariffs and retaliatory measures in China may affect certain industries, which may eventually affect the economy. 

Our Perspective On The Truth About USA’s Soft Landing

These are the major factors which can affect the Soft landing of the economy. The key details lie inside the headlines of the data and news. Hence, it is important to delve deeper into the major indicators of the economy. It is important that the landing should be smooth, but with caution. 

Other than the above-mentioned factors, the geo-politics also plays a vital role in soft landing. The ongoing wars, the economic slowdown in China, the recession in the UK and in Japan can have spill-over effects. Therefore, policymakers should be more cautious, like a well-experienced pilot who does a safe and smooth landing. 

Conclusion

Navigating the economic landscape demands a keen understanding of diverse factors. Our analysis emphasizes the importance of scrutinizing key indicators, from job market resilience to fiscal challenges. As the USA aims for a soft landing, caution is paramount, considering potential pitfalls like debt, interest rates, and international trade dynamics.

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