Economists now predict the U.S. is heading for a soft landing. Here’s what that means.

With inflation cooling and hiring remaining strong, economists are now venturing that something other than a recession may be around the corner: a so-called soft landing.

That’s a quite a turnabout from earlier this year. Economists in February were were predicting that the U.S. was about to tumble into a recession — thanks to the Federal Reserve’s 11 interest rate hikes since early 2022 and signs that inflation-weary businesses and consumers might be pulling back from spending. 

Yet so far, the economy has continued to plow ahead, and inflation is retreating faster than some economists expected. Some types of products are even seeing deflation, or a decline in prices compared with a year ago. The Federal Reserve sounded cautiously optimistic on Wednesday, with Chair Jerome Powell saying he was “pleased with the progress” in the battle against inflation and the Fed’s goal of keeping full employment.

“I have always felt, since the beginning, that there was a possibility, because of the unusual situation, that the economy could cool off in a way that enabled inflation to come down without the kind of large job losses that have often been associated with high inflation and tightening cycles,” Powell said on Wednesday. 

This year, the U.S. economy has engineered a rare confluence of trends, as inflation has cooled considerably while the economy has continued to grow — something that “many economists thought would be impossible,” noted Brian Rose, senior U.S. economist at UBS Global Wealth Management in a Monday research note.

“We maintain our view that the economy is headed for a soft landing,” he added.

Here’s what to know about a soft landing. 

What is a soft landing?

A soft landing is “the equivalent of ‘Goldilocks’ porridge’ for central bankers: following a tightening, the economy is just right – neither too hot (inflationary) nor too cold (in a recession),” noted Sam Boocker and David Wessel of the Brookings Institution.

But, they noted, there’s no official definition of a soft landing, and the National Bureau of Economic Research (NBER), which determines when the U.S. is in an official recession, doesn’t outline the requirements for a soft landing — or a hard landing, for that matter.

How does that differ from a recession?

A recession is generally considered two consecutive quarters of declining economic growth, but the NBER describes it a little more broadly: “a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

Generally, recessions include a decline in GDP and a rise in job cuts, which is how most Americans typically experience a recession. During the Great Recession, about 700,000 people lost their jobs each month from October 2008 to April 2009, according to Brookings. 

What happens to the job market in a soft landing?

In a soft landing, the unemployment rate might rise, but the incline would be far from the extremes experienced in the Great Recession, when the jobless rate jumped from 5% to 10%. 

Right now, the Fed is forecasting that the jobless rate will inch up to 4.1% for 2024 and 2025, slightly higher than its current rate of 3.7%. 

That also marks a retreat from the Fed’s 2022 projection that the jobless rate would jump to 4.4%, resulting in an additional 1.2 million people losing their jobs. But, so far, companies have been loath to fire workers given a tight labor market that’s made it more difficult to maintain and hire employees. 

What about inflation?

Part of the good news about a soft landing is that inflation is projected to continue cooling from its current level of 3.1%. And that could help consumers increase their standard of living, given that employers say they’ll boost wages by 4% next year. 

The Fed, for its part, is forecasting that inflation as measured by the PCE index will sink to 2.4% next year. On Wednesday, the central bank held off on boosting rates, while also projecting three rate cuts in 2024.

“[I]nflation has surprised their projections to the downside, and that progress allows the Fed to consider lifting its foot off the policy brakes earlier than anticipated,” noted TD Securities analysts in a Wednesday research note. 

Does this mean a recession isn’t in the cards?

A recession is still possible, of course. Powell stressed in his comments on Wednesday that while he’s pleased with the economy’s progress, he isn’t declaring victory yet. 

“I think there’s always a probability that there will be a recession in the next year, and it’s a meaningful probability no matter what the economy is doing,” Powell said. 

Indeed, some economists are still predicting a recession, albeit later in 2024.

“PNC expects a decline in consumer spending in the second half of 2024 as the U.S. economy enters into a mild recession,” noted PNC analysts in a research note. “High interest rates and modest job losses will cause households to turn more cautious.”

If the economy’s great, why do I feel like I’m falling behind?

The majority of Americans say their income isn’t keeping up with inflation. That’s leaving many feeling disgruntled with the economy, even as the jobless rate remains low and the economy continues to grow. 

Powell nodded to this issue on Wednesday, saying that consumers are very sensitive to prices, but that wages are catching up.

“People are still living with high prices, and that is something that people don’t like,” he said. “Real wages are now positive, so that wages are now moving up more than inflation as inflation comes down, and so that might help improve the mood of people.”

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