Even casual consumers of financial news likely recognize the terms “hard landing” and “soft landing” as they pertain to the economy. That isn’t to say they have a clear understanding of what each means, however. So, before I proceed to the real topic at hand, it will be important to know what each is and how to distinguish between the two.
“Hard landing” and “soft landing” are the terms used to describe what are fundamentally the two possible outcomes for an economy that is subject to central bank efforts to rein in high inflation.
When inflation climbs above the 2% target and is determined by the Federal Reserve to be chronic (rather than transitory), the Fed will apply select measures in an attempt to reduce demand and get that inflation back down to 2%.
The most well-known of those measures is the raising of interest rates. When the Federal Reserve increases the cost of money, borrowing by consumers and businesses becomes more expensive and overall demand drops.
As demand drops, price pressures tend to subside and the rate of inflation declines as well. That’s a good thing. But if the Fed raises rates at a pace greater than what is needed to bring inflation back under control, it can trigger an economic downturn; a recession, in other words, and a hard landing.
In that case, the Fed raises rates in a fashion such that the economy’s energy sources – including labor and consumer spending – are interrupted and output as measured by gross domestic product (GDP) suffers drastically.
When the Fed is applying measures to bring down inflation, they try to do so in a way that helps the economy achieve a soft landing. A soft landing doesn’t mean there’s no fallout, but it does mean a more modest impact on the labor market, consumer-spending levels and GDP.
This brings me to the real topic of this piece. You probably know the U.S. has been dealing with an inflation problem for going on two years now. You may know, as well, that to fight inflation, the Fed currently is engaged in the most rapid rate-tightening campaign in about 40 years. Yet despite these rate hikes, the economy has managed to post decent numbers for both consumer spending and GDP, and outstanding numbers for its official unemployment rate. As a matter of fact, the latest government data says unemployment is now at a 53-year low.
In other words, a year of rapid rate hikes has not only not forced the economy into making either a hard or soft landing, but it seems that select economic data like unemployment is actually improving. And because of that, some observers are saying we should consider a third possible outcome for the economy, one never seriously considered before this year: no landing of the economy, which means continued growth despite persistent inflation and a restrictive rate environment.
Sound impossible? I tend to agree. But the no-landing scenario has its supporters – including some of the biggest names in economics. As you might imagine, it also has plenty of detractors, one of whom dismisses it as a “fairy tale.”
As the saying goes, if something sounds too good to be true, it probably is. Let’s see if we can determine if the no-landing scenario is a good example of that.
Among those who’ve expressed support for the idea of a no-landing scenario is economist Ed Yardeni of Yardeni Research. Yardeni is a frequent guest on popular financial media outlets. During recent appearances on Blooomberg and CNBC, he referenced continued strength in consumer spending and other key metrics as justifications of the no-landing outcome.
“The consumer data continues to show that you don’t want to bet against the American consumers,” Yardeni said on Bloomberg. “When they’re happy they spend money…when they’re depressed they spend even more money.”
During a prior appearance over at CNBC, Dr. Yardeni mentioned he was particularly buoyed by the third- and fourth-quarter 2022 GDP numbers as well as ongoing strength in unemployment data. While he conceded a measure of that spending likely is attributable to consumers raiding their savings, he also said that he expects to see an improvement in real wages shortly.
In other words, Yardeni is saying that the nation’s economic engine is succeeding in remaining oblivious to higher inflation and higher rates, and cultivating a no-landing outcome.
Economist Jeremy Siegel of the Wharton School is another who’s suggested the possibility of a no-landing scenario for the economy. During a recent appearance of his on CNBC, Siegel cited continued strength in the labor market as justification that the economy can keep expanding despite persistent inflation.
It is true that a year into stringent rate hikes and two years into higher inflation, recent economic data related to output looks to be improving. Consumer spending, for example, was up nearly 2% in January after coming in negative in both November and December. After real GDP growth was negative for the first two quarters of 2022, it bounced back in Q3 and Q4 at an annual rate of 3.2% and 2.7%, respectively. And unemployment in January fell to its lowest level since 1969.
So, unlike Santa Claus, the Easter Bunny and the “all-you-can-eat” diet, the no-landing scenario actually is a real thing – right?
Maybe not. Let’s keep plugging ahead.
Oft-cited economist David Rosenberg of Rosenberg Research had this to say recently about the no-landing scenario:
“The ‘no landing,’ it’s a nice fairy tale, but that’s what it is.”
“I don’t think that there’s a ‘get out of jail free’ card for the economy, in the context of the most acute Fed tightening cycle and into the most inverted yield curve since 1981,” Rosenberg continued. “We just haven’t seen the full brunt of the rate shock just yet.”
What he’s saying gets to the heart of why we’re seeing what looks – at first glance – like a no-landing scenario playing out: Namely, the effects of the fastest rate-tightening cycle in four decades are still working their way through the economy. And once they do, the U.S. will find itself in a recession.
There’s no shortage of economists who share Rosenberg’s general viewpoint and outlook. One recent poll found that nearly 60% of the nation’s business economists still expect a recession to begin sometime this year. Separately, The Conference Board said a couple of weeks ago that even though “U.S. GDP growth defied expectations in late 2022…we expect persistently high inflation and rising interest rates” to push the economy into recession by the end of the first quarter.
And despite widespread hopes toward the beginning of the year that the central bank was on the verge of pausing rate increases, there now is no reason to believe the Fed won’t keep hiking. The latest price data revealed monthly inflation accelerated sharply in January, and year-over-year inflation remains well over 6%. Plus, the minutes from the Fed’s most recent meeting make repeated references to “ongoing” rate hikes – and that meeting was held before the latest round of inflation data became known.
For his part, Gregory Daco, chief economist at EY-Parthenon, believes the no-landing scenario is simply illogical given that its premise relies on the idea that our cyclical economy is somehow no longer cyclical.
“No landing does not make any sense, because it essentially means the economy continues to expand, and it’s part of an ongoing business cycle and it’s not an event — it’s just ongoing growth,” Daco said recently. “Doesn’t that entail that the Fed will have to raise rates more, and doesn’t that increase the risk of a hard landing?”
In other words, if the no-landing scenario is real, the economy would continue to expand regardless of inflation and interest-rate dynamics. That simply doesn’t happen.
I just said that it’s not possible to have an environment where growth is ongoing against a backdrop of higher inflation and higher rates. Some – including economists Yardeni and Siegel – might say we’re seeing that right now. Technically, they would be correct, at least as far as recent metrics indicate.
But I would wager there’s a material difference between a secular no-landing outlook where growth continues despite higher rates and inflation…and a limited period where positive activity continues while the effects of the Fed’s tranquilizer are continuing to work their way through the bloodstream of the economy.
Economist David Rosenberg says the former is a “fairy tale,” and it’s difficult to disagree with that assessment. Nothing about the Fed’s historical or current posture on inflation – or the long-term best interests of the economy – suggest the central bank will allow inflation to roam wild and free.
To be clear, there is some speculation among economists that the Fed won’t do what is necessary to get inflation below 3% because of the tremendous cost to the economy they believe would result. But even if the Fed does ultimately decide against breaking the economy to get back to 2% inflation, that doesn’t mean they won’t bend it very hard to get inflation a lot closer to 2% from where it is right now – a still-daunting 6.4%.
Bending in that way necessarily means hiking rates to a point that eventually prompts a decline in consumer spending, a rise in unemployment and, consequentially, a drop in economic output. If we’re lucky, the resulting landing could be soft – or softish – but, more likely, it would be recessionary (which is what the previously referenced majority of economists expect).
What looks like a no-landing economy scenario right now, then, is really nothing more than a landing delayed, in my opinion. Along those same lines, chartered financial analyst Michael Lebowitz recently made clear his view that “time is not on the no-landing scenario’s side.” One key reason for that, according to Lebowitz, is consumers’ continued depletion of personal savings and heavy reliance on debt in order to engage in the same spending that Ed Yardeni and others cite as proof of the no-landing scenario’s legitimacy.
It remains to be seen if the economy ultimately will come in for a hard landing, soft landing or perhaps some mix of the two. But no landing?
“A no-landing scenario is a pipe dream,” insists Lebowitz.
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