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Decoding the Economics of a Soft Landing



The following content is sponsored by New York Life Investments
Decoding the Economics of a Soft Landing

Decoding the Economics of a Soft Landing

Is a soft landing on the horizon?

So far, the U.S. economy has illustrated unexpected strength, with S&P 500 returns up over 18% year-to-date. A resilient labor market and cooling inflation have improved the odds of the U.S. avoiding a recession, in spite of 11 interest rate hikes since March 2022.

This graphic, sponsored by New York Life Investments, shows three key factors that could impact whether the U.S. achieves a soft landing.

What is a Soft Landing?

Historically, after a steep rise in interest rates, the U.S. economy often falls into recession.

Still, there have been some exceptions where it avoided a sharp downturn. The most notable example was in 1994-1995, when the Fed raised interest rates seven times in one year without triggering a recession.

Consider the following general definitions:

  • Soft landing: The Federal Reserve raises interest rates just enough to stabilize inflation. A recession is avoided, or only a minor one occurs.
  • Hard landing: The Federal Reserve raises interest rates too far, excessively slowing the economy and causing a recession.

Below, we show the factors having an outsized influence on the health of the U.S. economy today.

1. The Labor Market

The U.S. labor market is an important indicator of economic health.

In July, there were 1.7 job openings for every unemployed person, highlighting strong demand for workers. In fact, almost 4 million jobs have been added since 2020, recovering the majority of jobs that were lost due to the pandemic.

At the same time, the U.S. unemployment rate remains near five-decade lows, sitting at just 3.5% as of July.

Why Does This Matter?

  • Wages have been steadily rising, although not fast enough to significantly impact inflation.
  • With no shortage of job options, this suggests economic strength, supporting a soft landing.

2. Inflation

Inflation has fallen to 3.2% in July, down from a peak of 8.9% seen in June 2022.

We can see in the table below that inflation has been stabilizing, but core inflation, which excludes food and energy, has been declining at a slower pace. The Fed watches core inflation more closely since it is less affected by short-term price fluctuations, and is therefore a better barometer of where prices are headed.

DateInflation (%)Inflation Excluding Food & Energy (%)
Jul 20233.2%4.7%
Jun 20233.1%4.9%
May 20234.1%5.3%
Apr 20235.0%5.5%
Mar 20235.0%5.6%
Feb 20236.0%5.5%
Jan 20236.3%5.5%
Dec 20226.4%5.7%
Nov 20227.1%6.0%
Oct 20227.8%6.3%
Sep 20228.2%6.6%
Aug 20228.2%6.3%
Jul 20228.4%5.9%
Jun 20228.9%5.9%
May 20228.5%6.0%
Apr 20228.2%6.1%
Mar 20228.5%6.5%
Feb 20228.0%6.4%
Jan 20227.6%6.1%
Dec 20217.2%5.5%
Nov 20216.9%5.0%
Oct 20216.2%4.6%
Sep 20215.4%4.0%
Aug 20215.2%3.9%
Jul 20215.2%4.2%
Jun 20215.3%4.4%
May 20214.9%3.8%
Apr 20214.1%3.0%
Mar 20212.6%1.7%
Feb 20211.7%1.3%
Jan 20211.4%1.4%
Dec 20201.3%1.6%
Nov 20201.2%1.7%
Oct 20201.2%1.6%
Sep 20201.4%1.7%
Aug 20201.3%1.7%
Jul 20201.0%1.5%
Jun 20200.7%1.2%
May 20200.2%1.2%
Apr 20200.3%1.4%
Mar 20201.5%2.1%
Feb 20202.3%2.4%
Jan 20202.5%2.3%

Housing costs accounted for 90% of inflation’s increase in July, while food and energy costs increased slightly. And even though inflation remains above the 2% target set by the Federal Reserve, we can see that price pressures continue to be easing.

Why Does This Matter?

  • If inflation continues to subside, the Federal Reserve may be able to cut interest rates.
  • This could help pave the way toward a soft landing as lower borrowing costs support stock market performance.

3. Consumer Savings

Household spending makes up roughly two-thirds of U.S. GDP.

During the pandemic, excess savings—those that go beyond expected savings—hit historic levels. Analysis from the Federal Reserve shows that excess savings hit a peak of $2.1 trillion in August 2021, but have since fallen to $190 billion as of June this year.

Americans also had access to more liquid funds than before the pandemic. The table below shows household liquid assets by income level compared to pre-pandemic levels.

Household Liquid AssetsPre-Pandemic Average
Q4 2022
Lowest Income Level Households24%33%
Highest Income Level Households13%15%

Household income distribution from lowest 20% to highest 20%.

These liquid assets have likely provided a buffer for consumers in the face of rising costs and interest expenses. More liquid assets mean that consumers have the ability to spend more, supporting economic growth.

Why Does This Matter?

  • Excess savings are projected to bolster consumer spending through the third quarter of 2023.
  • This will support business investment and help prevent a rise in unemployment.

Soft Landing Playbook

Despite these positive signals, the full effects of rising interest rates may take time to filter through the economy. With this in mind, the following investments could help investors navigate interest rate uncertainty and mixed recession forecasts:

  • Value equities: Historically have more stable earnings than growth equities.
  • Pairing longer-dated and short-dated bonds: This type of bond strategy allows for investors to pivot if interest rates change, and to lock-in higher rates over longer horizons.

Together, these investments may allow investors to weather an unpredictable market environment.

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