A ‘soft landing’ is still on the table, economists say

Published

7 months ago

August 7, 2024

Traders on the floor of the New York Stock Exchange during afternoon trading on Aug. 02, 2024.

Michael M. Santiago | Getty Images

Recession fears led to a sharp stock-market selloff in recent days, with the S&P 500 index posting a 3% loss Monday, its worst in almost two years.

Weaker-than-expected job data on Friday fueled concerns that the U.S. economy is on shaky footing, and that the Federal Reserve may have erred in its goal of achieving a so-called “soft landing.”

A soft landing would mean the Fed charted a path with its interest-rate policy that tamed inflation without triggering an economic downturn.

Federal data on Friday showed a sharp jump in the U.S. unemployment rate. Investors worried this signaled a “hard landing” was becoming more likely.

However, the odds of a recession starting within the next year are still relatively low, economists said.

In other words, a soft landing is still in the cards, they said.

Economic data still justifies a soft landing, says Apollo's Torsten Slok

“I think far and away the most likely scenario is a soft landing: The economy avoids an economic downturn,” said Mark Zandi, chief economist at Moody’s.

Likewise, Jay Bryson, chief economist at Wells Fargo Economics, said a soft landing remains his “base case” forecast.

But recession worries aren’t totally unfounded due to some signs of economic weakness, he said.

“I think the fears are real,” he said. “I wouldn’t discount them.”

Avoiding recession would also require the Fed to soon start cutting interest rates, Zandi and Bryson said.

If borrowing costs remain high, it increases the danger of a recession, they said.

Why are people freaking out?

The “big shock” on Friday — and a root cause of the ensuing stock-market rout — came from the monthly jobs report issued by the Bureau of Labor Statistics, Bryson said.

The unemployment rate rose to 4.3% in July, up from 4.1% in June and 3.5% a year earlier, it showed.

A 4.3% national jobless rate is low by historical standards, economists said.

But its steady increase in the past year triggered the so-called “Sahm rule.” If history is a guide, that would suggest the U.S. economy is already in a recession.

The Sahm rule is triggered when the three-month moving average of the U.S. unemployment rate is half a percentage point (or more) above its low over the prior 12 months.

That threshold was breached in July, when the Sahm rule recession indicator hit 0.53 points.

Goldman Sachs raised its recession forecast over the weekend to 25% from 15%. (Downturns occur every six to seven years, on average, putting the annual odds around 15%, economists said.)

Zandi estimates the chances of a recession starting over the next year at about 1 in 3, roughly double the historical norm. Bryson puts the probability at about 30% to 40%.

The Sahm rule may not be accurate this time

However, there’s good reason to think the Sahm rule isn’t an accurate recession indicator in the current economic cycle, Zandi said.

This is due to how the unemployment rate is calculated: The unemployment rate is a share of unemployed people as a percent of the labor force. So, changes in two variables — the number of unemployed and the size of the labor force — can move it up or down.

The Sahm rule has historically been triggered by a weakening demand for workers. Businesses laid off employees, and the ranks of unemployed people swelled.

However, the unemployment rate’s rise over the past year is largely for “good reasons” — specifically, a big increase in labor supply, Bryson said.

More Americans entered the job market and looked for work. Those who are on the sidelines and looking for work are officially counted amid the ranks of “unemployed” in federal data, thereby boosting the unemployment rate.

The labor force grew by 420,000 people in July relative to June — a “pretty big” number, Bryson said.

Meanwhile, some federal data suggest businesses are holding on to workers: The layoff rate was 0.9% in June, tied for the lowest on record dating to 2000, for example.

‘The flags are turning red’

That said, there have been worrying signs of broader cooling in the labor market, economists said.

For example, hiring has slowed below its pre-pandemic baseline, as have the share of workers quitting for new gigs. Claims for unemployment benefits have gradually increased. The unemployment rate is at its highest level since the fall of 2021.

“The labor market is in a perilous spot,” Nick Bunker, economic research director for North America at job site Indeed, wrote in a memo Friday.

“Yellow flags had started to pop up in the labor market data over the past few months, but now the flags are turning red,” he added.

Other positive signs

There are some positive indicators that counter the negatives and suggest the economy remains resilient, however.

For example, “real” consumer spending (i.e., spending after accounting for inflation) remains strong “across the board,” Zandi said.

That’s important since consumer spending accounts for about two-thirds of the U.S. economy. If consumers keep spending, the economy will “be just fine,” Zandi said.

I think far and away the most likely scenario is a soft landing: The economy avoids an economic downturn.

Mark Zandi

chief economist at Moody’s

Underlying fundamentals in the economy like the financial health of households are “still pretty good” in aggregate, Bryson said.

It’s also a near certainty the Fed will start cutting interest rates in September, taking some pressure off households, especially lower earners, economists said.

“This is not September 2008, by any stretch of the imagination, where it was ‘jump into a fox hole as fast as you can,'” Bryson said. “Nor is it March 2020 when the economy was shutting down.”

“But there are some signs the economy is starting to weaken here,” he added.

Finance

Stocks making the biggest moves premarket: DPZ, BABA, RIVN, PLTR

Published

14 minutes ago

February 24, 2025

Business Finance News

Finance

China strives to attract foreign investment amid geopolitical tensions

Published

12 hours ago

February 23, 2025

Business Finance News

Tensions between the world’s two largest economies have escalated over the last several years.

Florence Lo | Reuters

BEIJING — China is trying yet again to boost foreign investment, amid geopolitical tensions and businesses’ calls for more concrete actions.

On Feb. 19, authorities published a “2025 action plan for stabilizing foreign investment” to make it easier for foreign capital to invest in domestic telecommunication and biotechnology industries, according to a CNBC translation of the Chinese.

The document called for clearer standards in government procurement — a major issue for foreign businesses in China — and for the development of a plan to gradually allow foreign investment in the education and culture sectors.

“We are looking forward to see this implemented in a manner that delivers tangible benefits for our members,” Jens Eskelund, president of the European Union Chamber of Commerce in China, said in a statement Thursday.

The chamber pointed out that China has already mentioned plans to open up telecommunications, health care, education and culture to foreign investment. Greater clarity on public procurement requirements is a “notable positive,” the chamber said, noting that “if fully implemented,” it could benefit foreign companies that have invested heavily to localize their production in China.

There will be a 'stronger push' for foreign direct investments by the Chinese government: Strategist

China’s latest action plan was released around the same time the Commerce Ministry disclosed that foreign direct investment in January fell by 13.4% to 97.59 billion yuan ($13.46 billion). That was after FDI plunged by 27.1% in 2024 and dropped by 8% in 2023, after at least eight straight years of annual growth, according to official data available through Wind Information.

All regions should “ensure that all the measures are implemented in 2025, and effectively boost foreign investment confidence,” the plan said. The Ministry of Commerce and National Development and Reform Commission — the economic planning agency — jointly released the action plan through the government’s executive body, the State Council.

Officials from the Commerce Ministry emphasized in a press conference Thursday that the action plan would be implemented by the end of 2025, and that details on subsequent supportive measures would come soon.

“We appreciate the Chinese government’s recognition of the vital role foreign companies play in the economy,” Michael Hart, president of the American Chamber of Commerce in China, said in a statement. “We look forward to further discussions on the key challenges our members face and the steps needed to ensure a more level playing field for market access.”

AmCham China’s latest survey of members, released last month, found that a record share are considering or have started diversifying manufacturing or sourcing away from China. The prior year’s survey had found members were finding it harder to make money in China than before the Covid-19 pandemic.

Consumer spending in China has remained lackluster since the pandemic, with retail sales only growing by the low single digits in recent months. Tensions with the U.S. have meanwhile escalated as the White House has restricted Chinese access to advanced technology and levied tariffs on Chinese goods.

‘A very strong signal’

While many aspects of the action plan were publicly mentioned last year, some points — such as allowing foreign companies to buy local equity stakes using domestic loans — are relatively new, said Xiaojia Sun, Beijing-based partner at JunHe Law.

She also highlighted the plan’s call to support foreign investors’ ability to participate in mergers and acquisitions in China, and noted it potentially benefits overseas listings. Sun’s practice covers corporates, mergers and acquisitions and capital markets.

The bigger question remains China’s resolve to act on the plan.

“This action plan is a very strong signal,” Sun said in Mandarin, translated by CNBC. She said she expects Beijing to follow through with implementation, and noted that its release was similar to a rare, high-profile meeting earlier in the week of Chinese President Xi Jinping and entrepreneurs.

That gathering on Feb. 17 included Alibaba founder Jack Ma and DeepSeek’s Liang Wenfeng. In recent years, regulatory crackdowns and uncertainty about future growth had dampened business confidence and foreign investor sentiment.

China needs to strike a balance between tariff retaliation and stabilizing FDI, Citi analysts pointed out earlier this month.

“We believe China policymakers are likely cautious about targeting U.S. [multinationals] as a form of retaliation against U.S. tariffs,” the analysts said. “FDI comes into China, bringing technology and know-how, creating jobs, revenue and profit, and contributing to tax revenue.”

In a relatively rare acknowledgement, Chinese Commerce Ministry officials on Thursday noted the impact of geopolitical tensions on foreign investment, including some companies’ decision to diversify away from China. They also pointed out that foreign-invested firms contribute to nearly 7% of employment and around 14% of taxes in the country.

Previously, official commentary from the Commerce Ministry about any drop in FDI tended to focus only on how most foreign businesses remained optimistic about long-term prospects in China.

Finance

The Fed is stuck in neutral as it watches how Trump’s policies play out

Published

1 day ago

February 23, 2025

Business Finance News

U.S. Federal Reserve Chair Jerome Powell testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on “The Semiannual Monetary Policy Report to the Congress,” at Capitol Hill in Washington, U.S., Feb. 11, 2025.

Craig Hudson | Reuters

The popular narrative among Federal Reserve policymakers these days is that policy is “well-positioned” to adjust to any upside or downside risks ahead. However, it might be more accurate to say that policy is stuck in position.

With an abundance of unknowns swirling through the economy and the halls of Washington, the only gear the central bank really can be in these days is neutral as it begins what could be a long wait for certainty on what’s actually ahead.

“In recent weeks, we’ve heard not only enthusiasm — particularly from banks, about possible shifts in tax and regulatory policies — but also widespread apprehension about future trade and immigration policy,” Atlanta Fed President Raphael Bostic said in a blog post. “These crosscurrents inject still more complexity into policymaking.”

Bostic’s comments came during an active week for what is known on Wall Street as “Fedspeak,” or the chatter that happens between policy meetings from Chair Jerome Powell, central bank governors and regional presidents.

Officials who have spoken frequently described policy as “well-positioned” — the language is now a staple of post-meeting statements. But increasingly, they are expressing caution about the volatility coming from President Donald Trump’s aggressive trade and economic agenda, as well as other factors that could influence policy.

The impact tariffs could have on growth is being underpriced, says PGIM’s Tom Porcelli

“Uncertainty” is an increasingly common theme. In fact, Bostic titled his Thursday blog post “Uncertainty Calls for Caution, Humility in Policymaking.” A day earlier, the rate-setting Federal Open Market Committee released minutes from the Jan. 28-29 meeting, with a dozen references to the uncertain climate in the document.

The minutes specifically cited “elevated uncertainty regarding the scope, timing, and potential economic effects of possible changes to trade, immigration, fiscal, and regulatory policies.”

Uncertainty factors into the Fed’s decision making in two ways: the impact that it has on the employment picture, which has been relatively stable, and inflation, which has been easing but could rise again as consumers and business leaders get spooked about the impact tariffs could have on prices.

Missing the target

The Fed targets inflation at 2%, a goal that has remained elusive for going on four years.

“Right now, I see the risks of inflation staying above target as skewed to the upside,” St. Louis Fed President Alberto Musalem told reporters Thursday. “My baseline scenario is one where inflation continues to converge towards 2%, providing monetary policy remains modestly restrictive, and that will take time. I think there is a potential for inflation to remain high and activity to slow. … That’s an alternative scenario, not a baseline scenario, but I’m attentive to it.”

The operative in Musalem’s comment is that policy holds at “modestly restrictive,” which is where he considers the current level of the fed funds rate between 4.25%-4.5%. Bostic was a little less explicit on feeling the need to keep rates on hold, but emphasized that “this is no time for complacency” and noted that “additional threats to price stability may emerge.”

Chicago Federal Reserve President Austan Goolsbee, thought to be among the least hawkish FOMC members when it comes to inflation, was more measured in his assessment of tariffs and did not offer commentary in separate appearances, including one on CNBC, on where he thinks rates should go.

“If you’re just thinking about tariffs, it depends how many countries are they going to apply to, and how big are they going to be, and the more it looks like a Covid-sized shock, the more nervous you should be,” Goolsbee said.

Many risks ahead

More broadly, though, the January minutes indicated a Fed highly attuned to potential shocks and not interested in testing the waters with any further interest rate moves. The meeting summary pointedly noted that committee members want “further progress on inflation before making additional adjustments to the target range for the federal funds rate.”

There’s also more than just tariffs and inflation to worry about.

The minutes characterized the risks to financial stability as “notable,” specifically in the area of leverage and the level of long-duration debt that banks are holding.

Prominent economist Mark Zandi — not normally an alarmist — said in a panel discussion presented by the Peter G. Peterson Foundation that he worries about dangers to the $46.2 trillion U.S. bond market.

“In my view, the biggest risk is that we see a major sell off in the bond market,” said Zandi, the chief economist at Moody’s Analytics. “The bond market feels incredibly fragile to me. The plumbing is broken. The primary dealers aren’t keeping up with the amount of debt outstanding.”

“There’s just so many things coming together that I think there’s a very significant threat that at some point over the next 12 months, we see a major sell-off in the bond market,” he added.

In this climate, he said, there’s scant chance for the Fed to cut rates — though markets are pricing in the potential for a half percentage point in reductions by the end of the year.

That’s wishful thinking considering tariffs and other intangibles hanging over the Fed’s head, Zandi said.

“I just don’t see the Fed cutting interest rates here until you get a better feel about inflation coming back to target,” he said. “The economy came into 2025 in a pretty good spot. Feels like it’s performing well. Should be able to weather a lot of storms. But it feels like there’s a lot of storms coming.”