Hard Landing? Soft Landing? These Economists Say There'll Be No Landing At All

So far, views of how the economy would progress after the Federal Reserve’s attempts to fight inflation through a tough monetary policy — raising interest rates and reducing the Fed’s balance sheet of bond holdings — have fallen into two camps.

In one, the preferred “soft landing,” with the economy slowing gradually and touching down with unemployment remaining moderate and no recession. The other, “hard landing,” would see some significant disruption in economic activity and higher unemployment.

But with the slow changes in inflation, GDP, and the job market, the Philadelphia Fed’s Fourth Quarter 2023 Survey of Professional Forecasters has 34 economic forecasters looking toward a different possibility. If everything keeps changing slowly, it might be up in the air for a long time.

“The forecasters predict the economy will expand at an annual rate of 1.3 percent this quarter, up slightly from the prediction of 1.2 percent in the last survey,” the report said. “On an annual-average over annual-average basis, the forecasters expect real GDP to increase 2.4 percent in 2023 and 1.7 percent in 2024. These annual projections are 0.3 and 0.4 percentage point higher than the estimates in the previous survey.”

Along the same vein, the forecasters expect unemployment to increase but slowly. They expect a 3.7% rate in 2023 that will increase to 4.0% in 2026. They also expect higher job numbers this year and 2024. “The projections for the annual-average level of nonfarm payroll employment imply job gains at a monthly rate of 296,500 in 2023 and 120,000 in 2024, up from the previous estimate of 288,600 and 94,800, respectively,” the report said.

The previous survey looked to an inflation rate of 2.9%. Now they’re saying 3.3%, with headline personal consumption expenditures inflation staying at the previous estimate’s 2.4% annual.

“The forecasters see the risk of a downturn in real GDP this quarter at 31.8 percent, down from the previous estimate of 34.4 percent,” they wrote. “However, they have raised their probability estimates for negative growth for the following three quarters, compared with their previous estimates. The forecasters now predict a mid-30 percent to a near-40 percent chance of a contraction in real GDP in any of the four quarters in 2024.”

But is business as more or less usual mean that things are okay? Many economists think so, pointing to slowing inflation and increasing real average hourly earnings going up. And yet, consumers, on whom the entire economy depends, remain dissatisfied with diminishing expectations.

The problem comes in how incomes are defined. Real average earnings are likely top weighted with more growth than most people feel. Look instead at real median household income, so taking growing costs into account, on a non-seasonally adjusted basis and it’s clear that starting in 2019, household incomes in the middle of the economy started going down and have continued to do so. Savings from the pandemic relief funds is pretty much gone. Credit card debt has hit new heights. Defaults on various types of debt are rising. Up in the air may not be sustainable.