We’ve never had a soft landing
The media often discusses previous “soft landings” experienced by the US, citing examples such as the rate increases of 1994. Don’t believe them. Interest rates are not the economy. The US economy has never had a soft landing (although other countries have them–for instance the UK in the early 2000s.)
There’s only one sensible definition of soft landing:
Soft Landing: The labor market fully recovers from the previous recession and low inflation growth continues for at least three years.
There was one occasion (beginning in February 1966), where the labor market was fully recovered for nearly 4 years, but inflation did not stay low. The landing was so soft that we never actually landed the plane. The Fed was like a skittish fighter pilot that never touches the deck of the carrier.
Will this be our first soft landing? Who knows? The macroeconomy is basically impossible to predict. I suspect that July 2018 to July 2021 would have been America’s first soft landing, if not for Covid. (Sorry Trump, you don’t get credit for “If only”!! But Jay Powell gets two shots at it.)
Unemployment fell to 3.6% in March 2022. If it’s still in the 3.4% to 4.0% range in March 2025, and inflation is back to roughly 2%, then I’d call that a soft landing. A year ago that seemed less than a 50-50 proposition (based on history). Now that we are already 17 months into this period, perhaps the odds are up to 50-50. In other words, I have no idea.
PS. The slow growth in August’s average hourly wages makes a soft landing a tiny bit more likely.
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1. September 2023 at 08:53
But Australia showed it can be done!
1. September 2023 at 11:21
SG, And the UK, and lots of other countries.
1. September 2023 at 13:54
“The labor market fully recovers from the previous recession and low inflation growth continues for at least three years.”
Wouldn’t 1996-2000 qualify?
1. September 2023 at 15:07
Scott,
Great post. Do you think this time may be different because the overheating was caused by Covid policy response etc…? Why do you think you need three years of 2 ish inflation for your definition? I think investors will be calling it a soft landing at one year.
1. September 2023 at 15:23
Cameron, No, the labor market didn’t recover until 1999.
TF, I think the policy response made things more difficult, by overheating the economy.
I think we need to be at 2% by the end of the period, not necessarily for all three years.
1. September 2023 at 15:48
Getting down to 2% inflation, as measured, might be a stretch given US housing markets.
Kevin Erdmann has been doing good work in this area.
Given the gigantic structural impediment that it is housing in the US, maybe 3% is a better target.
Suffocating the economy to reach an arbitrary goal is not good macroeconomics.
1. September 2023 at 19:34
If you rate the chance of a soft landing at 50-50, what’s your best guess of what is going on at the moment? We have the Atlanta Fed’s GDPNow suggesting 5.6% real GDP growth in Q3, and even the ‘blue chip consensus’ is at about 2.4%. With UnN at 3.8%, potential real growth must be no more than 2%, and significantly less based on your previous hunches. Could we be seeing something now like the late 2010s when labour force participation unexpectedly kept increasing? Although while the overall LFP rate is slightly off immediately pre-Covid levels, the prime age LFP rate is back at prior peaks. If we don’t continue to see higher levels of participation (most likely from above-55s returning?), then it’s hard to see any landing in sight. The bond market seems to be of that mind, with the 10yr yield back up to late October 2022 highs. Any thoughts?
1. September 2023 at 21:21
SS: “There’s only one sensible definition of soft landing” [followed by some arbitrary definition specifying three (3) years] – when you lose the argument, change the goal posts…
1. September 2023 at 21:41
Rajat, I suspect that immigration plays a role. Recent levels of immigration are greater than I expected. I had trend growth at 1.5%–maybe it’s a bit higher than I thought.
But I don’t see any sort of major paradox to be explained, as RGDP growth has been pretty slow over the past 6 quarters.
Ray, Still desperately seeking attention, eh? (I didn’t change any goal posts and I didn’t lose the argument.)
2. September 2023 at 03:56
The damage has already been done. This isn’t the GFC. Home prices still dropped while interest rates were declining during the GFC. Today, a drop in interest rates will raise home prices.
“the divergence between bank deposits and money-market fund assets” demonstrates an increase in the transaction’s velocity of funds.
Savings transferred through the nonbanks increases the supply of loan funds, but not the supply of money (a velocity relationship).
The 1966 Interest Rate Adjustment Act drove the banks out of the savings business, increasing non-inflationary velocity.
2. September 2023 at 04:20
Only Powell changes the goal posts:
“We are navigating by the stars under cloudy skies,” Powell said
See: Measuring the Natural Rate of Interest After COVID-19∗
https://www.newyorkfed.org/medialibrary/media/research/economists/williams/HLW_2023
R star is a fudge factor.
2. September 2023 at 11:11
Unemployment just went from 3.5% to 3.8; inflation also just ticked up. Looking less like a soft landing. EU looks like its going in the same direction unfortunately.
2. September 2023 at 12:37
TMC, The unemployment change is not statistically significant. Ignore it.
2. September 2023 at 14:22
Scott, I wasn’t so much thinking of a paradox to be explained but just that if the GDPNow forecast is right, it’s hard to see inflation not taking off again in a hurry. Is your 50/50 prediction of a soft landing based largely on the accuracy of that GDPNow forecast or are there other factors that could prevent a takeoff even if that forecast is correct? For example, if for some reason it is only anticipating a short-term growth boost?
3. September 2023 at 05:57
You wonder how people so smart can be so dumb, esp. with Friedman pioneering the paradigm.
“In statistics and econometrics, a distributed lag model is a model for time series data in which a regression equation is used to predict current values of a dependent variable based on both the current values of an explanatory variable and the lagged (past period) values of this explanatory variable.”
“At the Dec. 27–29, 1971, American Economic Association meetings, Milton Friedman (1972) presented a revision of his prior work on the lag in effect of monetary policy (e.g. Friedman 1961). His new conclusion was that ‘monetary changes take much longer to affect prices than to affect output’ ”
There are two definite money lags, one for the real output of goods and services, and one for inflation. And neither one is 12-months (or the conventional wisdom). The other problem is identifying means-of-payment money (isolating money intended for spending from the money held as savings). And that’s obvious too (from the G.6 release).
The proxy for R-gDp bottomed in May. The proxy for inflation has been decelerating (and now at a slower pace).
3. September 2023 at 09:53
Rajat, I don’t have strong views on the forecast. If I had to guess I’d say it will be a bit lower than the current forecast. But the higher the actual figure the lower the likelihood of a soft landing.
4. September 2023 at 06:30
The award rate on O/N RRPs is 5.30% for $1,574.065 on 9/1/23. The rate on 3mo T-bills is higher. Thus, funds have come out of the O/N RRP.
There’s been a $734b drawdown since 4/24. That’s not a liability swap (removing cash from the FED). If that’s what it takes to fund the Treasury’s tsunami, then interest rates would have risen further without that funding source?
4. September 2023 at 08:43
https://www.newyorkfed.org/markets/rrp_faq.html
FAQs: Reverse Repurchase Agreement Operations
July 26, 2023
“Of course, if the buyer of a reverse repo or a security sold by the Fed is a nonbank and pays for the purchase using its bank account, the money supply is directly affected.”
“The Fed Indirectly Shrinks the Money Supply”
http://www.wsj.com/articles/fed-money-supply-inflation-reverse-repo-11628288902
4. September 2023 at 09:05
See the FED’s contradictory statement: Link: “Understanding Bank Deposit Growth during the COVID-19 Pandemic”
https://www.federalreserve.gov/econres/notes/feds-notes/understanding-bank-deposit-growth-during-the-covid-19-pandemic-20220603.htm
“On the other hand, the deposits may leave the banking system if the holder of the deposits exchanges them for a different bank liability, such as longer-term bank debt, or if the deposits are used either to buy shares in a money market mutual fund, which then uses those deposits to buy alternative bank liabilities or Treasury securities directly from the U.S. Treasury department, or to invest them in the Federal Reserve’s Overnight Reverse Repurchase (ON RRP) facility.”
4. September 2023 at 20:27
Rajat,
Markets certainly seem to predict an economic slowdown in the first half of next year. This is not only true if you look at the Fed Funds futures market, but also the S&P 500 futures curve.
13. September 2023 at 00:16
– But I thought the monetarists and central banks were able to engineer a “soft landing” ?
13. September 2023 at 09:03
Mr. Market, Central banks have done so in other countries—it’s about time they do so in the US.
Not sure what you mean by “monetarists”; they’ve never been in charge of policy.