Economic ‘Soft Landing’ Prospects Are Fading

By Emel Akan
Emel Akan
Emel Akan
reporter
Emel Akan writes about business and economics. Previously she worked in the financial sector as an investment banker at JPMorgan. She graduated with a master’s degree in business administration from Georgetown University.
June 27, 2022 Updated: June 30, 2022

The chance of a “soft landing” for the U.S. economy has come down since the Federal Reserve raised interest rates by 75 basis points this month. Recession fears are mounting, and Google Trends data show more Americans are searching for the term “recession” than at any other time since 2004.

Because of the failure of both fiscal and monetary policies, a growing number of economists believe that the Fed alone will be unable to address the underlying causes of inflation. However, the belated campaign to curb soaring prices will almost certainly trigger a recession, they say.

“We are skating right on the verge of a recession,” economist Steve Moore told The Epoch Times.

During this time, the Biden administration should prioritize measures that expand the economy, he said, such as investing in oil and gas and coal development, creating employment, reducing business regulations, and encouraging people to go back to work.

“With Joe Biden in the White House, we’re going to see a lot of policy blunders that are going to probably cause a recession,” Moore said. “And hopefully, it’ll be a soft recession, not a hard one. But, boy, it’s really looking bad out there.”

He cited the significant slowdown in manufacturing and the cooling housing market as warning signs.

“It’s all self-inflicted wounds,” he said.

A moderate economic decline that occurs after a period of expansion is referred to as a “soft landing.” A central bank seeks to raise interest rates just enough to avoid a hard landing or a severe rise in unemployment while preventing an economy from overheating.

A recession is “not inevitable,” declared President Joe Biden in a recent interview, adding that “we’re in a stronger position than any nation in the world to overcome this inflation.”

However, slowing growth in consumer spending and business investments, according to analysts, will be recession catalysts in the coming months as higher interest rates take their toll on economic activity.

According to Morgan Stanley, a “soft landing” is still conceivable, “but the possibility may now be slim.” Most econometric models now predict a recession with a probability of 60 percent, up from 30 percent previously, the investment bank said in a recent note.

There’s no sign of a labor market recession yet, as jobless claims remain in line with pre-pandemic levels. However, Moore pointed out that the fight to reduce inflation could cause a “temporary contraction” in the workforce. Purchasing power has already begun to erode as wage growth fails to keep pace with inflation.

‘Hard Landing’

The Federal Reserve raised its benchmark interest rates by 75 basis points at its June meeting, and the median expectation among policymakers is for rates to end the year at 3.4 percent.

According to Desmond Lachman, economist and senior fellow at the American Enterprise Institute, history won’t judge the Fed kindly, as it’s likely to send the economy into a hard landing by slamming on the monetary policy brakes too abruptly.

The simultaneous decline in the equity, bond, and cryptocurrency markets since the beginning of the year has resulted in the evaporation of almost $15 trillion, or 70 percent of U.S. gross domestic product (GDP), in household wealth, Lachman told The Epoch Times.

This is another reason why consumers are likely to reduce their spending drastically. The Fed’s rule of thumb suggests families cut spending by 4 cents for every dollar of wealth lost, according to Lachman.

In a recent op-ed article in The Hill, he projected that the slump in asset values may cause consumers to reduce their spending by 3 percentage points of GDP.

Jim Glassman, head economist for commercial banking at JPMorgan Chase, also says an increase in interest rates wouldn’t fix the inflation problem “without doing harm to the broader economy.”

However, he takes a different approach to the inflation problem than many economists, who blame excessive money supply and government stimulus as the primary causes of inflation. According to Glassman, current pricing pressures are mostly the product of supply-side issues rather than demand, and they will subside over time.

“We are spending a little more on goods and a little less on services than we were before the pandemic. And that probably is why we’re seeing pressures on the supply chains and shipping system,” he said in a recent podcast.

Following the interest rate decision, Fed Chair Jerome Powell repeatedly signaled that crafting a “soft landing” has become increasingly difficult.

“What is becoming more clear is that many factors that we don’t control are going to play a very significant role in whether that’s possible or not,” Powell told reporters.

He predicted “fairly strong” economic growth in the second half of this year despite indications of a retreating housing market and sluggish corporate investment.

In June, factory activity recorded its weakest growth in almost two years. The S&P Global U.S. Manufacturing Purchasing Managers’ Index (PMI), which measures the performance of the manufacturing sector, dipped to 52.4 in June from 57.0 in May, well below the market forecast.

The weaker-than-expected data suggest that soaring inflation, material shortages, and supply delays are beginning to weigh more heavily on economic activity.

Another disappointment was the steep decline in the S&P Global U.S. Services PMI, which measures business conditions in the services sector, including consumer, communication, finance, and real estate. The index fell to 51.6 in June from 53.4 in May, due to fewer new orders and sales.

While analysts say the economy continues to perform well, they’re slashing their growth projections to account for the significant decline in manufacturing and services activity. They also project that consumer spending, confidence, and business investment will decline sharply as financial conditions tighten.

Meanwhile, corporate earnings remain healthy. They haven’t yet been affected, casting doubt on the credibility of imminent recession forecasts.

“I think you’re going to see a hit on earnings very suddenly in the months ahead,” Moore said.

The trillions of dollars lost in stock valuations, according to Moore, already represent the impending blow to corporate profitability.

The stock market sell-off is “just crushing American savings,” he said. “That’s another reason why I think we’re going to face a tough period, because people are just running out of money.”

Emel Akan
reporter
Emel Akan writes about business and economics. Previously she worked in the financial sector as an investment banker at JPMorgan. She graduated with a master’s degree in business administration from Georgetown University.