A Predicted Soft Economic Landing May Have An Undertow

The number of big names in economics cheering on an economic soft landing — a return to a 2% inflation rate without a recession intercession or high unemployment — has been noteworthy.

• Treasury Secretary Janet Yellen told Bloomberg in an interview on the way back from the G-20 economic summit in New Delhi that she was “feeling very good about that prediction” of a soft landing.
• Nobel winner Paul Krugman wrote in the New York Times
  NYT
  in July that “we may be heading for a soft landing” with consumer prices “better than even optimists had expected” and dismissing “some fairly peevish reactions from economists who had committed themselves to the grim view that we would face a nasty ‘sacrifice ratio’ — that controlling inflation would require years of high unemployment.”
• Not quite as enthusiastically, Larry Summers told Bloomberg Television a couple of weeks ago that the economy is still strong and that a cooling labor market signaled a further approach to a soft landing.
• Top economists of the American Bankers Association said in a survey expected that real gross domestic product (GDP) — meaning taking inflation into account — would drop to 1.2% in 2024 with an unemployment rate edging up to 4.1%.

Growing positivity (if looking toward more people being out of work is positive), but much of this sounds like people seems like people selling a vision. And that is certainly part of it. There are political pressures and the common need for experts to seem like they are prescient.

But this is an uncertain time, and it is dangerous to assume that everything has to work out. It doesn’t and there are signs of disturbance.

To understand the biggest issues, note that consumer spending generally represents 68% of GDP. Enough of a drop and consumers can bring the economy down quickly, sparking a recession.

The Federal Reserve Bank of New York runs its monthly Survey of Consumer Expectations. In the July edition, the median expectation of consumers was that household income would increase by 3.2%, but that household spending would grow by 5.4%. Now, in the latest August version, household income growth expectations were now 2.9% and spending would increase by 5.3%. That meant in July a cap between income and spending of 2.2%, with spending leading the way. For August, the gap was up to 2.4%. Consumers see themselves increasingly falling behind after years of inflation and the realities of most of the employment sector.

The Conference Board Consumer Confidence Index declined in August to 106.1, falling from July’s downwardly revised 114.0. And the Expectations Index — “based on consumers’ short-term outlook for income, business, and labor market conditions” —declined to 80.2 after a July rebound to 88.0. “August’s disappointing headline number reflected dips in both the current conditions and expectations indexes,” said Dana Peterson, chief economist at The Conference Board.

Bloomberg’s Markets Live Pulse Survey recently concluded that consumers were “about to hit a wall.” Out of the 526 respondents, more than half said personal consumption will drop early in 2024, and 21% said things will decline sooner.

Details of the Consumer Price Index, according to the U.S. Bureau of Labor Statistics (BLS), showed that the CPI was up 0.6% in August compared to 0.2% in July. Now, gas prices were a big part of this — half, according to the BLS — but without that, it was still higher in August than the previous month. Shelter rose for the 40th consecutive month, with apartment rents putting the squeeze on consumers. Core inflation, which takes out food and energy as more volatile items that can distract from a better trend understanding, was 4.3% over the previous 12 months. Slowing? Yes. Close to what the Fed expects? No. As experts have pointed out, many of the gains to date have been the easy ones. Squeezing out the remaining price expansion takes work.

The screws are tightening on the one segment most responsible for how the economy grows, even though consumers haven’t been the main drivers of inflation. For that, look to other factors, like corporate profits.

[corporate profits graph]

But it’s easier, maybe more palatable, for the Fed and other major economic forces to point to consumers.