- Some economists predict a "soft landing" for the US economy despite some warning signs.
- Positive labor market data and GDP growth support this, but job opportunities in some sectors are down.
Some economists think the US is well on its way to achieving the much-anticipated "soft landing." But there are warning signs still pointing to economic struggles down the line.
Barclays' Marc Giannoni, LinkedIn's Karin Kimbrough, and Charles Schwab's Liz Ann Sonders spoke at an NYU Stern Economic Outlook Forum earlier this month.
Giannoni said Barclays expects "activity to gradually slow and employment to gradually moderate," with the unemployment rate moving up slightly and inflation falling. He added that the economic conditions may point to a perfect soft landing.
There's plenty of evidence that the soft landing is on the way. Job growth continues to be strong. While the personal saving rate may be low, people are spending, and consumer confidence has climbed. Amid inflation cooling and another interest-rate hike pause in January, the Fed is cautiously optimistic about the future.
But there are still signs of a possible downturn in the near future. Not all job data is positive, with job openings falling from their post-pandemic highs. There are still pain points in the economy, like a lack of strong housing inventory. Lower-income Americans are still struggling in today's economy despite seeing some growth in real earnings and wage growth.
Below are some of the signs the economy is thriving, as well as some warning signs.
Labor market data is mostly positive
The labor market is still stable despite gradually slowing, Kimbrough said during the forum. The US added more jobs than expected in January, and the unemployment rate stayed at a low 3.7%.
Additionally, real income increased nationwide after the pandemic-era stimulus measures in the CARES Act and American Rescue Plan Act, which has made some households feel wealthier. Americans have been spending down that windfall lately — the personal saving rate is "very low," Giannoni said.
Giannoni said the labor market "remains pretty tight" and added there is a "strong feedback loop" between the labor market and consumption habits.
That is, firms add jobs, which means additional income for workers. Giannoni said "this income fuels consumption" and with the consumer buying various goods and services, consumers keep labor demand strong "so that firms keep adding jobs. As a result, firms are trying to produce more to meet the demand," although they might need to increase prices if they can't keep up with that demand.
Americans are more confident
With an index of 114.8 in January, The Conference Board Consumer Confidence Index, which analyzes how consumers view factors such as business outlook and employment, was the highest reading since December 2021. Meanwhile, the University of Michigan's Index of Consumer Sentiment, which assesses factors surrounding current and future spending and saving, had a score of 79.0 in January, up nearly 22% from a year prior.
While consumers are feeling confident, Giannoni said the US personal saving rate of 3.7% isn't sustainable long term.
Giannoni added that over time, "I would expect consumption growth to be slightly lower than the income growth in order for the saving rate to gradually move back up to levels that have been seen as more sustainable over time. That, I think, creates some downside risk to — potentially — to demand as a whole."
The Fed is optimistic but may wait to cut interest rates
Long-awaited interest rate cuts might not happen in March as the economy remains strong and inflation stays higher than the Fed desires. Fed Chair Jerome Powell said at the Federal Open Market Committee press conference in January, "I don't think it's likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that" based on January's meeting.
Powell said during the press conference that the Fed is looking for "greater confidence that inflation is moving sustainably down" to the Fed's 2% target.
"We want to see more good data. It's not that we're looking for better data," Powell said.
CPI data released Tuesday showed the year-over-year percent change in January was 3.1%, which is lower than December's but not as substantial a cooldown as economists hoped to see.
Given there are more data releases coming before the next FOMC meeting in March, NerdWallet's Elizabeth Renter said in Tuesday's commentary that this "doesn't mean today's inflation numbers don't matter, but rather that they're a single touchpoint in a catalog of recent-past and upcoming indicators."
"The Fed is not trying to crush the job market; they're trying to sort of crush job openings without doing anything that leads to an accelerated move-up in unemployment," Sonders said. "I think they don't believe that they have made enough headway on that front."
Many economists said they expect the Fed to push back when they will drop rates, with some thinking it won't be until June. Giannoni said in the forum rates may fall in May, followed by cuts at every other meeting after that in 2024, provided that inflation continues to come down and the economy gradually decelerates.
"They're not really looking for something to break — I think they're maybe looking for something to bend," Sonders said.
But monthly job openings are falling
Still, there might be some unfavorable signs for workers. Giannoni said there’s been "some moderation on the demand for labor on the part of firms."
Sonders said layoff announcements have been "quite a bit more top-down in nature than bottom-up" as is typically the case. These layoffs have targeted higher-income employees and managers, many of whom may have not rushed to the unemployment office due to severance packages or quickly finding another role, Sonders said.
Regardless of who is looking for work, they might not find as many opportunities as in recent years. The number of job openings per unemployed person was 1.4 in December, which is well above the historical average but below the highs seen in 2022.
Giannoni said there's still higher demand in some sectors compared to before the pandemic. Health services, leisure and hospitality, and professional business services are some of the areas with demand, Giannoni added.
The hiring pace has also slowed — Kimbrough said it’s about 10% slower than a year ago. Kimbrough said only about 10% of roles are remote, though "job seekers overwhelmingly apply to remote roles."
Data suggests workers are increasingly transitioning between jobs, which suggests some degree of optimism, Kimbrough said. The economists said the unemployment rate could rise faster than many expect — such as to 5% or 6%, Kimbrough noted — due to sudden risks, though the data does not support any major shocks.
Many lower-income Americans are still hurting
Household wealth has also increased across many income levels, though high-income households saw particularly sizable increases.
Despite that increase in net worth, lower-income quartiles are impacted more by inflation and high rates than higher-income Americans who may have bought a home decades ago. That has contributed to continuing distress about personal finances and the economy. Kimbrough said lower-income Americans have particularly relied on credit cards, hinting at some fragility.
Housing inventory levels are low
Sonders said homebuyers were smart for sticking to fixed-rate mortgages instead of adjustable rates. Still, there was a sharp fall in existing home sales when mortgage rates increased from 3% to 7% in 2022, which caused home prices to fall briefly before rising again.
"If you had a 3% mortgage, there wasn't really much incentive to sell and then have to double your payment," Sonders said. "So it's sort of stuck the existing market, putting all the action in the new home market, which is only about 15% of the overall residential real estate market."
Homebuyers aren't the only ones facing a shortage of options. New York City's rental inventory, for instance, is especially low. A recent press release about the New York City Housing and Vacancy Survey noted that the vacancy rate was 1.4% in 2023.
Nationwide, Giannoni said there is still a fairly low housing inventory and anticipates demand will continue to be strong for the next decade. Low housing inventory began prior to the pandemic, and then "people wanted more space and wanted more homes because of the pandemic," Giannoni said.
"I think this will be a growing part of the investment pie within GDP, maybe not very near term given all the uncertainties that we have been talking about, but I think there are interesting opportunities for investment in not just residential investment but business capital spending," Sonders said. "I think the investment side of our economy is going to start to chip away a little bit at the discretionary consumption weight in our economy."