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

Published

8 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

China’s response to U.S. tariffs will likely focus on stimulus, trade

Published

2 hours ago

April 3, 2025

Business Finance News

Chinese national flags flutter on boats near shipping containers at the Yangshan Port outside Shanghai, China, February 7, 2025.

Go Nakamura | Reuters

BEIJING — China’s reaction to new U.S. tariffs will likely focus on domestic stimulus and strengthening ties with trading partners, according to analysts based in Greater China.

Hours after U.S. President Donald Trump announced additional 34% tariffs on China, the Chinese Ministry of Commerce called on the U.S. to cancel the tariffs, and vowed unspecified countermeasures. The sweeping U.S. policy also slapped new duties on the European Union and major Asian countries.

Chinese exports to the U.S. this year had already been hit by 20% in additional tariffs, raising the total rate on shipments from China to 54%, among the highest levied by the Trump administration. The effective rate for individual product lines can vary.

But, as has been the case, the closing line of the Chinese statement was a call to negotiate.

“I think the focus of China’s response in the near term won’t be retaliatory tariffs or such measures,” said Bruce Pang, adjunct associate professor at CUHK Business School. That’s according to a CNBC translation of the Chinese-language statement.

Instead, Pang expects China to focus on improving its own economy by diversifying export destinations and products, as well as doubling down on its priority of boosting domestic consumption.

Watch for cascading tariffs as tariffs reroute trade within Asia, says economist

China, the world’s second-largest economy, has since September stepped up stimulus efforts by expanding the fiscal deficit, increasing a consumption trade-in subsidy program and calling for a halt in the real estate slump. Notably, Chinese President Xi Jinping held a rare meeting with tech entrepreneurs including Alibaba founder Jack Ma in February, in a show of support for the private sector.

The policy reversal — from regulatory tightening in recent years — reflects how Beijing has been “anticipating the coming slowdown or even crash in exports,” Macquarie’s Chief China Economist Larry Hu said in a report, ahead of Trump’s latest tariff announcement. He pointed out that the pandemic-induced export boom of 2021 enabled Beijing to “launch a massive regulatory campaign.”

“My view stays the same,” Hu said in an email Thursday. “Beijing will use domestic stimulus to offset the impact of tariffs, so that they could still achieve the growth target of ‘around 5%.'”

Instead of retaliatory tariffs, Hu also expects Beijing will focus on still using blacklists, export controls on critical minerals and probes into foreign companies in China. Hu also anticipates China will keep the yuan strong against the U.S. dollar and resist calls from retailers to cut prices — as a way to push inflationary pressure onto the U.S.

China’s top leaders in early March announced they would pursue a target of around 5% growth in gross domestic product this year, a task they emphasized would require “very arduous work” to achieve. The finance ministry also hinted it could increase fiscal support if needed.

About 20% of China’s economy relies on exports, according to Goldman Sachs. They previously estimated that new U.S. tariffs of around 60% on China would lower real GDP by around 2 percentage points. The firm still maintains a full-year forecast of 4.5% GDP growth.

Changing global trade

What’s different from the impact of tariffs under Trump’s first term is that China is not the only target, but one of a swath of countries facing hefty levies on their exports to the U.S. Some of these countries, such as Vietnam and Thailand, had served as alternate routes for Chinese goods to reach the U.S.

At the Chinese export hub of Yiwu on Thursday, businesses seemed nonchalant about the impact of the new U.S. tariffs, due to a perception their overseas competitors wouldn’t gain an advantage, said Cameron Johnson, a Shanghai-based senior partner at consulting firm Tidalwave Solutions.

He pointed out that previously, the U.S. had focused its trade measures on forcing companies to remove China from their supply chains and go to other countries. But Chinese manufacturers had expanded overseas alongside that diversification, he said.

“The reality is this [new U.S. tariff policy] essentially gives most of Asia and Africa to China, and the U.S. is not prepared,” Johnson said. He expects China won’t make things unnecessarily difficult for U.S. businesses operating in the country and instead will try harder to build other trade relationships.

Since Trump’s first four-year term ended in early 2021, China has increased its trade with Southeast Asia so much that the region is now Beijing’s largest trading partner, followed by the European Union and then the U.S.

The 10 member states of the Association of Southeast Asian Nations (ASEAN) joined China, Japan, South Korea, Australia and New Zealand in forming the world’s largest free trade bloc — the Regional Comprehensive Economic Partnership (RCEP) — which came into being in early 2022. The U.S. and India are not members of the RCEP.

“RCEP member countries will naturally deepen trade ties with one another,” Yue Su, principal economist, China, at the Economist Intelligence Unit, said in a note Thursday.

“This is also partly because China’s economy is likely to remain the most — or at least among the most—stable in relative terms, given the government’s strong commitment to its growth targets and its readiness to deploy fiscal policy measures when needed,” she said.

Uncertainties remain

The extent to which all countries will be slapped with tariffs this week remains uncertain as Trump is widely expected to use the duties as a negotiating tactic, especially with China.

He said last week the U.S. could lower its tariffs on China to help close a deal for Beijing-based ByteDance to sell TikTok’s U.S. operations.

But the level of new tariffs on China was worse than many investors expected.

“Unlike some of the optimistic market forecasts, we do not expect a US-China bilateral grand bargain,” Ting Lu, chief China economist at Nomura, said in a note Thursday.

“We expect tensions between these two mega economies to worsen significantly,” he said, “especially as China has been making large strides in high-tech sectors, including AI and robotics.”