Chart Of The Week   May 20 2022

A Soft Landing?

Soft Landing

According to BCA Research’s Global Investment Strategy service, although the unemployment rate has never risen by more than one-third of a percentage point in the US without a recession occurring, there are three reasons to think that a soft landing can be achieved this time around.

First, increasing labor market slack is easier if one can raise labor supply rather than reducing labor demand. Right now, the participation rate is nearly a percentage point below where it was in 2019, even if one adjusts for increased early retirement during the pandemic.

Wages have risen relatively more at the bottom end of the income distribution. This should draw more low-wage workers into the labor force. Furthermore, according to the Federal Reserve, accumulated bank savings for the lowest-paid 20% of workers have been shrinking since last summer, which should incentivize job seeking.

Second, long-term inflation expectations remain well contained, which makes a soft landing more likely. Median expected inflation 5-to-10 years out in the University of Michigan survey stood at 3% in May, roughly where it was between 2005 and 2013. Median expected earnings growth in the New York Fed Survey of Consumer Expectations was only slightly higher in April than it was prior to the pandemic.

A third reason for thinking that a soft landing may be easier to achieve this time around is that the US private-sector financial balance – the difference between what the private sector earns and spends – is still in surplus. This stands in contrast to the lead-up to both the 2001 and 2008-09 recessions, when the private sector was living beyond its means.