Can we still have a soft landing?
We’re told a recession is coming, but 311,000 new jobs were added in February, compared with the average monthly gain of 343,000 over the prior six months (including 504,000 in January). More women are returning to the workforce, we had encouraging retail sales and consumer confidence reports to start the year, and the last quarterly report said the national economy is growing at nearly 3%. The state of Wisconsin has rarely had more people employed, and recent monthly unemployment rates for metro Madison ranged from 1.6% to 2%.
For months, we’ve been told the Federal Reserve’s more aggressive interest rate posture would slow the economy to bring inflation back down to its 2% target rate. As the encouraging data continued well into March, one thought came to mind: What if the Fed can still engineer a soft economic landing — no recession or a very mild recession that is short in duration — as it ratchets up interest rates to quell inflation? What if the purveyors of doom are wrong?
My thought bubble quickly burst with a reading of leading economic indicators. One sure-bet leading indicator is our currently inverted yield curve. Since World War II, an inverted yield curve — where interest rates for short-term borrowing rise higher than rates for long-term borrowing — has reliably forecast recessions.
The Fed had to be hoping for a larger reduction in annual inflation than the January report provided (6.4%, down from 6.5% in December). By that time, the central bank had reduced its rate hikes to 25 basis points, but the labor market was still red hot and core services inflation, which excludes volatile energy price swings and is the measure the Fed puts more stock in, was up 7.2% year over year. As of January, it had risen for 17 consecutive months. Two Fed officials indicated they would have supported a half-point rise at the Fed’s February meeting, and Fed Chairman Jerome Powell later signaled his agreement. Unless the Fed pulls back due to recent bank failures, we can now expect higher interest rate increases. It’s one reason some large companies are laying off 5% of their workforce.
There are other canaries in the recessionary coal mine. In the housing market, the fourth quarter of 2022 was the first time since at least 1974, when data first became available, that the quarterly number of housing units built-for-rent (133,000) exceeded the number of single-family units built-for-sale (126,000). According to economist Elliot Eisenberg, the only other times these numbers came that close together were during the devastating recessions of 1982 and 2008–09. Hold on to your hats.