2024: A Soft Landing for the American Economy?
Could 2024 be a year unlike any in America’s post-war economic history? Interestingly, experts suggest that a soft landing might be on the horizon, with annual inflation projected to recede to 2.5% by the end of the year and real GDP growth expected to align with its long-term trend at 1.7%.
Optimism abounds in financial markets as this transition, from higher inflation to lower levels, is anticipated to occur without triggering a recession. The Federal Reserve has been diligently raising interest rates since March 2022 in an effort to combat inflation. This is a risky maneuver, as monetary tightening often leads to an economic contraction. However, despite historical evidence that suggests rate hikes are usually followed by downturns, there are examples of such transitions happening without catastrophe. Notably, in the mid-1980s and late 1990s, despite rate increases, no recessions ensued – although, in those instances, inflation had not soared to the highs witnessed in 2022.
The signal for a successful soft landing would be a meeting of both annual headline and core inflation falling below 2.5% on the Fed’s preferred price index. It’s a rare occurrence for inflation to stabilize at or near 2%, further emphasizing the significance when both annual headline and core inflation align with targets.
Over the past three months, America’s core prices have locked in an annualized pace of 2.2%, suggesting that the annual measure could dip below 2.5% in February. Consequently, barring unforeseen spikes in things like oil prices, it seems likely that headline inflation could also hit the target.
However, detecting a soft landing isn’t just about inflation. Historically, recessions are usually declared long after they’ve already taken hold. An interesting rule known as the “Sahm rule” serves as a real-time indicator of an impending recession. Developed by Claudia Sahm, it triggers when the three-month moving average of the unemployment rate increases by 0.5 percentage points. Currently, unemployment has risen by 0.3 percentage points compared to its mid-2023 low, raising some concerns about a potential downturn.
Unique circumstances, such as the influx of workers re-entering the job market post-pandemic, have complicated the application of the Sahm rule. However, should the Fed meet its inflation target without the triggering of the Sahm rule, it would be a strong signal that the economy has landed safely.
While reaching the target is a significant milestone, the work isn’t over. Acting cautiously, the Fed has signaled plans to cut interest rates in 2024 and is prepared to adjust its policy operations. The goal is to ensure that current interest rates align with the natural resting-point, thereby avoiding both excessive stimulus or unwanted inflation.
Furthermore, fiscal policy remains a concern given America’s significant underlying deficit, which reached 7.5% of GDP during the 2023 fiscal year. Any swift and drastic measures to reduce this deficit could impact the broader economic landscape.
As economists and policymakers proceed with caution, it’s important to highlight that while the idea of a soft landing is appealing, it still remains a projection. Since the pandemic, forecasters have had a mixed track record in predicting economic trends. With their recent anticipation of a soft landing, it’s advisable to remain cautious and monitor the situation closely.
The anticipation of a soft landing in 2024 is indeed promising. However, it’s wise to stay vigilant and approach this potential development with measured optimism. As always, in the world of economics and finance, it’s best to wait and see before drawing any definitive conclusions.
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