The path to a “soft landing” does not seem as simple as it did four months ago. But the expectations of a year ago have been exceeded.
The economic news of the past two weeks has been enough to leave even the most seasoned observers baffled. The unemployment rate fell. Inflation increased. The stock market crashed, then recovered, then fell again.
However, if we take a step back, the image will look sharper.
Compared to the outlook in December, when the economy appeared to be headed for a surprisingly smooth “soft landing,” recent news has been disappointing. Inflation has proven more persistent than expected. Interest rates are likely to remain at their current level, the highest in decades, at least until the summer, if not into next year.
However, move the point of comparison back a bit, to early last year, and the story changes. Back then, forecasters widely predicted a recession, convinced that the Federal Reserve’s efforts to control inflation would inevitably result in job losses, bankruptcies and foreclosures. And yet inflation, even taking into account its recent setbacks, has cooled significantly, while the rest of the economy has so far escaped major damage.
“It seems churlish to complain about where we are now,” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution. “This has been a remarkably painless slowdown considering what we were all worried about.”
Monthly changes in consumer prices, job growth and other indicators are very important to investors, for whom every hundredth of a percentage point in Treasury yields can affect billions of dollars in transactions.
But for almost everyone else, it’s the slightly longer time frame that matters. And from that perspective, the economic outlook has changed in subtle but important ways.
Inflation is persistent, it is not increasing.
Inflation, measured by the 12-month change in the Consumer Price Index, peaked at just over 9 percent in the summer of 2022. The rate then fell sharply for a year, before plateauing at around 3 percent. .5 percent in recent months. An alternative measure preferred by the Federal Reserve shows lower inflation (2.5 percent in the latest data, from February) but a similar overall trend.
In other words: progress has slowed, but it has not been reversed.
On a monthly basis, inflation has increased slightly since the end of last year. And prices continue to rise rapidly in specific categories and for specific consumers. Car owners, for example, are being hit with a triple whammy: higher gas prices, higher repair costs and, most notably, higher insurance rates, which have risen 22 percent over the past year. .
But in many other areas inflation continues to decline. Grocery prices have been flat for two months and have risen just 1.2 percent over the past year. Prices of furniture, appliances and many other durable goods have been falling. Rent increases have moderated or even reversed in many markets, although that has been slow to be reflected in official inflation data.
“Inflation is still too high, but it is much less widespread than in 2022,” said Ernie Tedeschi, a researcher at Yale Law School who recently left a position in the Biden administration.
The rest of the economy is doing well.
The recent stabilization of inflation would be a major concern if it were accompanied by rising unemployment or other signs of economic trouble. That would put the authorities in a bind: if they try to shore up the recovery, they could risk adding fuel to the inflationary fire; If they continue to try to reduce inflation, they could push the economy into a recession.
But that’s not what’s happening. Inflation aside, most recent economic news has been reassuring, if not downright optimistic.
The labor market continues to exceed expectations. Employers added more than 300,000 jobs in March and added nearly three million in the past year. The unemployment rate has been below 4 percent for more than two years, the longest period since the 1960s, and layoffs, despite cuts at some high-profile companies, remain historically low.
Wages continue to rise, no longer at the dizzying pace of the early recovery, but at a pace that is closer to what economists consider sustainable and, crucially, faster than inflation.
Rising incomes have allowed Americans to continue spending even as the savings they built up during the pandemic have dwindled. Restaurants and hotels are still full. Retailers are coming off a record-breaking holiday season, and many are predicting growth this year as well. Consumer spending helped drive an acceleration in overall economic growth in the second half of last year and appears to have continued growing in the first quarter of 2024, albeit more slowly.
At the same time, sectors of the economy that struggled last year are showing signs of recovery. The construction of single-family homes has recovered in recent months. Manufacturers are reporting more new orders and factory construction has skyrocketed, in part because of federal investments in the semiconductor industry.
Interest rates will remain high for a while.
So inflation is too high, unemployment is low, and growth is strong. With that set of ingredients, the standard policymaking cookbook offers a simple recipe: high interest rates.
Indeed, Federal Reserve officials have signaled that interest rate cuts, which investors once expected earlier this year, will now likely wait at least until the summer. Federal Reserve Governor Michelle Bowman has even suggested that the central bank’s next move could be to raise rates, not cut them.
Investors’ expectation of lower rates was a major factor in the rise in stock prices in late 2023 and early 2024. That rally has lost steam as the outlook for rate cuts has grown bleaker. , and further delays could spell trouble for stock investors. Major stock indexes fell sharply on Wednesday after the unexpectedly positive consumer price index report; The S&P 500 ended the week down 1.6 percent, its worst week of the year.
In the meantime, borrowers will have to wait for any relief from high rates. Mortgage rates fell late last year in anticipation of cuts, but have since risen again, exacerbating the existing crisis in housing affordability. Interest rates on credit cards and auto loans are at the highest levels in decades, which is particularly difficult for low-income Americans, who are more likely to rely on those loans.
There are signs that higher borrowing costs are starting to take their toll: Delinquency rates have increased, particularly for younger borrowers.
“There is reason to be concerned,” said Karen Dynan, a Harvard economist who was a Treasury official under President Barack Obama. “We can see that there are sectors of the population that, for one reason or another, are under pressure.”
On the whole, however, the economy has resisted the harsh medicine of higher rates. Consumer bankruptcies and foreclosures have not spiked. Nor business failures. The financial system has not given way as some feared.
“What should keep us up at night is if we see the economy slowing down but the inflation numbers aren’t slowing down,” said Ms. Edelberg of the Hamilton Project. However, so far that is not what has happened. “We still have really strong demand and we just need monetary policy to stay tighter for longer.”
