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Many experts now expect a soft landing for the economy, with the Fed able to cool inflation without causing a recession.
GDP growth was recorded at 1.3% year-on-year in the first quarter, and the forecast tool issued by the Federal Reserve Bank of Atlanta indicates growth of 3% in the second quarter.
On the inflation front, consumer prices rose 3.3% in the 12 months through May, down from a 3.4% increase in April.
If inflation continues to decline — it actually rebounded early this year — the Fed could cut interest rates to keep the economy afloat.
Interest rate futures indicate a 64% probability that the Fed will cut rates by September, according to CME’s FedWatch tool. Futures indicate a 63% probability of at least two rate cuts by the end of the year.
As for the stock market, it’s already priced in for a soft landing, says Michael Wilson, chief investment officer at Morgan Stanley. He told BloombergThe S&P 500 is up 14% so far this year.
Federal Reserve Chair Jerome Powell noted that the economy is enjoying a soft landing so far, after the Fed raised interest rates higher in 2022-2023.
“These dynamics [falling inflation and economic buoyancy] “They can continue as long as they continue,” he said after a Fed meeting earlier this month.
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“We have a strong and good labor market. We believe we have made progress towards the goal of price stability. Is our political position correct? We believe yes.”
In the labor market, nonfarm payrolls jumped by 272,000 jobs in May, more than 50% above economists’ expectations of 180,000 jobs.
Paul Krugman’s vision of economics
But not everyone has a sunny view of the economy. “He’s starting to get a little worried about the economic slowdown,” Nobel Prize-winning economist Paul Krugman said. He wrote in the New York Times.
“There is nothing in the world that portends an impending recession, but there is a straw in the wind.”
He pointed to the slowdown in consumer spending and manufacturing.
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Inflation-adjusted consumer spending fell 0.1% in April. The manufacturing PMI registered 48.7% in May, down from 49.2% in April
“Again, we’re not talking about sounding the alarm yet, but the balance of risks has clearly changed,” Krugman said.
So it’s time to stop obsessing over inflation, which increasingly looks like yesterday’s problem, and start worrying about the prospect of recession.
He said higher interest rates could eventually erode the economy’s strength. (High rates prevent companies from investing and consumers from buying.)
Nuveen CIO Saira Malik handles economics
Saira Malik, chief investment officer at fund manager Nuveen, goes further than Krugman.
“Recession is a matter of when, not if.” she told Yahoo. Malik said that one of them is likely to start in the fourth quarter of this year or the first quarter of next year.
She also pointed to weak consumer spending, noting that foot traffic at retailers was beginning to slow.
More economic analysis:
- Stocks’ record high may have been caused by the fumes
- Consumers take advantage amid sticky inflation and slowing labor market
- Fed rate cut timing changes after retail sales data
Malik said that the labor market is also a source of concern, although not as much as the consumer sector. She noted that while payroll numbers are strong, unemployment claims are almost at cyclical highs.
The four-week moving average of initial jobless claims was 232,750 as of June 15, up from 227,250 the previous week.
Turning to the Fed, Malik says that “eventually… it will cut interest rates, but not enough to stave off a recession.”
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