DEEP DIVE: US Economy - Soft, Hard, Or No Landing?

We think we coined “rolling recession” back in the mid-1980s to describe the economic slowdown that many feared would turn into an economy-wide recession. We think the phrase accurately describes the performance of the US economy since early last year. It’s similar to a “growth recession,” “mid-cycle slowdown,” and “soft landing” but includes the concept that different areas of the economy are experiencing the slowdowns at different times.

We think we were among the first to raise the possibility of the “no landing” scenario for this year. Here is what we wrote in the January 9, 2023 Morning Briefing about this now possible scenario:

“There will be no landing for the economy this year. Instead, real GDP will grow by 2.0% or more. Inflation will moderate without a recession down to 3%-4% based on the PCED measure of consumer prices. By the end of this year, it will be closer to the bottom end of this range.”

Nevertheless, the soft-landing scenario remained our most likely outlook. Then came January’s strong batch of economic indicators during the first two weeks of February. In our February 6 Morning Briefing, we wrote: “Last week, there were more no-landing economic indicators than either soft-landing or hard-landing ones. … Debbie and I don’t recall a happier batch of economic indicators than the ones that came out last week.” Suddenly, we along with lots of other economists and strategists had to assess the odds of no landing.

Previously, we had been assigning subjective probabilities of 60% to a soft landing and 40% to a hard landing. We tried to keep things simple last year, but we have to acknowledge that there are now four possible scenarios for this year:

(1) Soft landing (40%). In the soft-landing scenario, economic growth slows to a crawl this year, with real GDP rising around 0.5%-1.5%. The PCED inflation rate moderates to 3.0%-4.0% this year and is closer to the bottom end of this range by year-end. The Fed raises the federal funds rate two more times, by 25bps each time, to 5.00%-5.25% and leaves it there through the end of this year. The 10-year Treasury bond yield this year remains below the 4.25% at which it peaked last year. The S&P 500 rises to 4500 this summer and closes the year at a new high of 4800 as investors anticipate stronger earnings in 2024. S&P 500 earnings per share rises from $215 last year to $225 this year, and investors discount $250 next year by the end of this year. Life is good.