US Economy: Is the Landing Soft? Will it continue like this?

In 1973, the United States was experiencing a worrying increase in inflation. But George SchultzThe then-Treasury Secretary suggested that the problem would be temporary: the economy might have a “soft landing”.

It was not so. The 1970s were a notorious decade of stagflation, and inflation was finally brought under control in the 1980s through tight monetary policies. Due to which there was a lot of unemployment for years.

So President Joe Biden was pushing his luck a bit when he declared in the State of the Union address that “the landing has been and will be soft.” But he is almost certainly right.

What do we mean by soft landing? Broadly speaking, achieving acceptably low inflation without high unemployment. But what specifically do we mean by low inflation and low unemployment? In October 2022, Harvard’s Jason FurmanThe moderate pessimist of the time, set some specific, if somewhat arbitrary, criteria, asked his readers to assign probabilities to possible outcomes, and gave their own assessment.

Basic PCE is the price index of personal consumption expenditures, excluding food and energy. federal Reserve Its use is preferred to guide monetary policy and is somewhat different from the consumer price index. We won’t have that February data until the end of this month, but in January the index grew at an annual rate of 2.5% over the previous six months, while unemployment never exceeded 4% in 2023. So we were comfortable with a scenario that Furman thought had only a 10% chance of occurring.

And we are very, very far off from the predictions of other economists, most famously larry summersWho believed that to reduce inflation we would have to go through years of very high unemployment.

That said, recent data (including Tuesday) has been somewhat disappointing, with two consecutive consumer price reports being somewhat positive and weak signs of a worsening labor market. Has soft landing been cancelled?

Probably not. I’m trying not to get into motivated reasoning, but I think there are good reasons not to take those high inflation numbers seriously. In fact, I’m a little more concerned about the growing risks of a recession.

First things first: You may have read that consumer prices, excluding food and energy, rose 3.8% last year. it’s so hurt. But I don’t know any serious economist who believes this is an accurate picture of underlying inflation.

Because there are two big problems with that number. First, one year is too long: inflation was falling throughout 2023, so the year-to-date figures give us a snapshot of the past. Second, this increase in core CPI is largely due to increases in housing prices, mostly owner-occupied rents (a price, by definition, no one actually pays) and, for technical reasons, house prices. Official measures of rent lag far behind market rents, which have remained roughly constant at the national level for a long time.

So where are we really? I prefer to look at the semi-annual change in consumer prices, excluding food, energy, used cars, and housing, not because the excluded items do not matter, but because they are very volatile or, in the case of housing, very More cold indicator. That index is growing at an annual rate of 2.8%.

We can analyze the numbers further, and as I write, many economists are busy doing so. But let me give you some other indicators that give me some confidence that core inflation is well below 3%.

One indicator is salary. Average hourly earnings have grown at an annual rate of less than 4% over the past six months, while productivity (a volatile figure, especially during and immediately following the pandemic recession) has grown at an annual rate of 1.6%. Of the epidemic. This suggests an underlying inflation rate of around 2.5%.

There is no indication in any of the surveys I have seen that inflation is rising again. So I’m pretty sure the inflationary side of the soft landing story still holds.

I am a little more concerned about the unemployment side. February’s unemployment rate of 3.9% was still low by historical standards, but rose somewhat. Many people, including myself, closely follow Sahm’s law, which is an empirical regularity claudia sahm, former Federal Reserve economist, who focuses on the three-month average of the unemployment rate. (As it happens, a sad but funny thing you often see on economics-related social media is kids, almost always kids, explaining Sahm’s Law to Claudia Sahm.)

The rule says that if the three-month moving average rises more than half a percentage point from the previous low, a recession is very likely. This has been so useful in the past that FRED, an invaluable source of economic data, provides ready graphs of Sahm rule measurements.

This solution is gaining momentum. It’s still below that crucial 0.5 level, but I worry that higher interest rates are finally taking their toll and by keeping them higher, the Fed is running the risk of ultimately making all those wrong recession forecasts come true.

But, at least for now, we’re still in soft landing territory. Something will go wrong eventually, because something always does. But compared to the dire predictions of many economists, not to mention the Biden administration’s political critics, we’re still in incredibly good shape.

© The New York Times 2024