The Soft Landing May Be Rougher Than Many Expect

There’s been lots of happy talk about a so-called soft landing for the economy — a glidepath back down to the officially desired 2% inflation without a recession. A return to normal without any great pain. Names like Janet Yellen, Paul Krugman, and even Larry Summers, who has been a significant critic of the Fed in the last year or two, think cooling inflation and labor market data are worth being bullish about. 

Except some experts and important sources of data are suggesting that things are getting worse again and that chances of recession are growing once more.

Carl Riccadonna, chief U.S. economist at BNP Paribas, during a recent briefing pointed out that U.S. growth has now fallen below the nominal federal funds rate, a sign that has proven “very ominous,” as Politico wrote. Corporate profits started to dip earlier this year. S&P Global Market Intelligence said last month that July corporate bankruptcy filings pushed the country past the total number of bankruptcies in 2022.

A new Federal Reserve Bank of San Francisco analysis of savings from the pandemic rescue funds, which had enabled new levels of savings credited with helping to drive down credit use and reduce poverty, projected that the excess savings would be gone by the end of October.

That might help explain why multiple surveys say that consumers seem ready to cut back their spending. The New York Fed’s regular consumer survey showed people expecting to see their spending rise faster than income increases. Surveys by both the Conference Board and Bloomberg found consumer confidence was falling.

Consumer signs are particularly concerning because 68% of GDP spending is by consumers. If they significantly slow spending, it’s like tapping on the economy’s brakes.

It’s enough to make some money experts take a second look and reconsider how safe things actually are. “Top fund managers at BlackRock and Amundi told the Financial Times that while the US economy has largely looked resilient in the face of aggressive monetary tightening by the Fed, cracks are now appearing, notably in the labor market,” the paper said. 

“The probability of a recession for us is very high,” Vincent Mortier, chief investment officer at Amundi, told the Financial Times. “The question mark is how deep and how long . . . We are much more concerned by the dynamics in the US than the consensus,” he said, adding that he expected the contraction to come at the end of this year or early next year.

BlackRock global fixed income chief investment officer Rick Rieder was even more pessimistic. 

“We had been pretty enthusiastic about the economy. But now, ironically, when I think people have written off a recession . . . now I actually think we are seeing some tangible signs of slowdown,” Rieder said. “I don’t think you can write off a recession.”