March 14, 2023
There has been much debate over the future of the US economy. Will the economy fall into a recession, or will we have a soft landing? Some have even opined on the possibility of no landing. As regular readers know, we have been calling for a US recession to start in 2023. Our conviction in that call remains high. As with any forecast, it is important to examine the opposite view. In that vein, we decided to consider the implications of the US economy avoiding a recession.
For reference, a recession occurs when economic activity falls, and it is typically identified by measuring the depth, diffusion, and duration of the decline. Conversely, a soft landing is a general slowdown in economic activity that doesn’t result in a protracted decline. Most economists agree that there were three soft landings over the past 60 years, with slowdowns in the mid-1960s, mid-1980s, and mid-1990s. During these time periods, economic growth slowed but did not broadly decline. In addition, the unemployment rate stopped falling but did not rise in any meaningful way.
Following the soft landings in the 1980s and 1990s, the unemployment rate proceeded to fall by 2.2 and 1.6 percentage points, respectively. How does this relate to the current economy? Recently, the US unemployment rate was the lowest in 54 years. Job openings, while off their peak, are still extremely elevated relative to history. If we have a soft landing, the unemployment rate is likely to move lower. Wage growth rose to 40-year highs during the post-COVID-19 period and has since come down very little. If the unemployment rate moves lower from here, wage growth will likely stay elevated, which in turn would likely keep inflation much higher than the US Federal Reserve’s 2% target. Therefore, if the US avoids a recession, interest rates will likely have to go much higher. We believe that a recession is necessary to bring inflation down. The Fed is determined to see this happen, one way or another.
US unemployment rate
Note: Shaded area on the chart indicates a period of recession.
Sources: Macquarie and Macrobond.