Christopher Alarcon | Wealth of Geeks
According to a term search conducted by FactSet, only 53 of the Standard & Poor’s 500 companies used the word “recession” in an official statement during the fourth quarter of 2023. This is noticeably lower than the 237 members who mentioned an imminent recession in the second quarter.
The FactSet survey, however, only examined the word “recession,” not other buzzwords typically associated with an economic downturn or adjustment, such as “slowdown.” Despite all indications of a white-hot economy powering its way into 2024, some still suggest a recession, or at least a hard landing is inevitable by the end of the year.
What Is a Recession?
Defining a recession is not an exact science, but many analysts and investors consider two consecutive quarters of shrinking Gross Domestic Product (GDP) to be an economic recession.
In 2023, however, GDP grew at an annual rate of 2.1% in the second quarter of 2023, and the Atlanta GDPNow model is currently projecting growth at a 5.4% pace in Q3. By the prevailing definition, there are no signs of an imminent recession.
The National Bureau of Economic Research (NBER) is officially responsible for declaring an economic recession in the United States. It vaguely defines a recession as, “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
“The word recession was probably overused by economists and politicians in 2023,” according to Prakash Kolli of the Dividend Power investing site. “Americans spent many months waiting for one, but it did not arrive. The Gross Domestic Product (GDP) is growing, the unemployment rate is sub-4%, and inflation has reduced to about 3%. These are not signs of a recession. Unless the economic statistics change significantly, we are probably looking at a soft landing rather than a broad downturn in 2024.”
What Is a Soft Landing?
Princeton economist Alan Blinder, a former Fed vice chair, uses specific criteria to define an economic soft landing. If there is less than a 1% decline in the GDP, or the NBER doesn’t declare an official recession after a year-long federal rate hike cycle, the economy is in line for a soft landing. GDP declines by less than 1%, or the NBER doesn’t declare a recession after at least a year of a Fed rate-hiking cycle; they consider that a soft landing. Blinder examined 11 periods of Fed rate increases from 1965 to 2019 and determined there were five soft or softish landings.
John Dealbreuin, a personal finance expert who writes at Financial Freedom Countdown, believes that the worst of inflation is behind us, giving the Fed room to cut interest rates, which could stave off a recession. The Fed dot plot indicates inflation would hover between 2 and 3 percent, helping them engineer a soft landing. The bond market has already priced in the cuts, and yields have fallen without the Fed actually needing to cut rates.
Best Arguments for a Recession
Soft Landing Indicators Are Not Infallible: In October of 2007, then-San Francisco Fed President Janet Yellen declared, “The most likely outcome is that the economy will move forward toward a soft landing.”
Two months later, the U.S. economy entered the Great Recession. The positive economic markers that supported Yellen’s “soft landing” forecast proved unsustainable, resulting in a non-linear turn of events.
Federal Rate Hikes Have Lag Time: Famed economist Milton Friedman once observed, “Monetary policy operates with long and variable lags.” Every economic marker used to determine a soft landing or a recession takes time to reach its full effect. Rising employment rates or an uptick in the housing market can affect the overall economy in just a few months. Hikes in federal lending rates or other adjustments, however, can take 18 to 24 months to affect the economy’s health.
Signs of Economic Downturn Already Exist: The National Bureau of Economic Research typically waits several months to make an official declaration after a recession has actually begun. The NBER’s recession-dating committee uses ever-changing criteria such as measures of income, employment, consumer spending, and factory output. This means that certain indicators of a potential recession are already in place but haven’t been fully evaluated yet by NBER.
Best Arguments for a Soft Landing
Job Openings and Vacancies: Conventional economic wisdom suggests an overheated labor market, such as the one in 2023, will only cool down through a rise in unemployment, which almost inevitably leads to a recession. However, an argument can be made that fewer job vacancies also means fewer wage gains, which can cool down the labor market and still contribute to a soft landing in 2024.
A Surge in Productivity: The U.S. economy is a balancing act between two sectors– one private and one public. When the private sector boosts productivity from within, like advanced technologies such as artificial intelligence, the public sector (federal regulators) take a more hands-off approach. The momentum created by increased productivity keeps the economy on track without government interference.
Economic Policies Are Working: Another sign pointing towards a soft landing in 2024 is the general success of President Biden’s economic policies. The Biden administration has been providing subsidies for high-tech industries such as electric vehicles and semiconductors, which in turn have inspired other sectors to become more creative or self-sustaining. Biden’s efforts to stem consumer debt, most notably student loans, have also had a positive effect on the economy.
Economic Shocks Could Still Fizzle Out: Many predictions of an impending recession are based on common economic shocks, such as industrial strikes, global slumps, government shutdowns, and spikes in the oil market. The 2023 U.S. economy has already faced these potential threats and continues to maintain momentum into early 2024. If 2024 remains relatively uneventful, the U.S. economy will likely experience a soft landing instead of a recession.
Brace in 2024?
The fact that fewer economists and corporate leaders are using the word “recession” in a sentence suggests a soft landing remains highly possible in 2024, and the U.S. economy will remain robust until at least 2025.
However, white-hot economies routinely experience growing pains in the form of “corrective” recessions and contractions. A short-term recession in 2024 would not necessarily have a chilling effect on overall economic growth. Will our economic outcome look bright at the end of this? Only time will tell.
Source: Orange County Register
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