Is the economy headed for recession or a soft landing?

2024-12-25 00:22:37 source: category:Markets

Are we in a recession right now?

It's a strange question. How could we not know if we're in a recession? It feels a little like asking, 'Am I sad right now?' If you're sad, shouldn't you feel it?

What is a recession anyway?

A recession is when the economy gets smaller, i.e. produces less stuff: fewer laptops, trucks, lattes, and haircuts. Normally, when that's happening, you feel it, people get laid off, businesses shut down and everything starts going on super sale.

But right now, nothing is really going according to plan. The data we're getting seem to be telling some very different stories.

A lot of the most important numbers are in: jobs and unemployment data, data about prices, debt and credit, and (the big one) economic growth itself (aka Gross Domestic Product).

Some of this data point squarely at a recession, some point to a "soft landing" scenario. And economists are divided over where we should be looking.

"We don't quite know what's going on," says Raguhram Rajan, an economist and professor of finance at the University of Chicago's Booth School of Business. "This situation is relatively unprecedented."

Fifty shades of slow

At the root of this confusion: inflation. Last year, as inflation rose, the Federal Reserve took action to bring prices down by raising interest rates.

Raising interest rates is intended to slow spending. Higher interest rates make it more expensive for people and businesses to borrow money, so they borrow less, spend less and ultimately buy less.

When spending slows, businesses lower prices to try to entice people to buy. And, just like that, prices fall. Inflation problem solved!

The trouble is, slowing down spending slows down the whole economy. The question at hand is what kind of slow are we talking about?

Are we talking about a recession kind of slow or will we be able to pull off a soft landing kind of slow, where the economy slows down a little, but not enough to be a recession.

Are we already in a recession?

Dana Peterson, chief economist at The Conference Board, an economic think tank, says she sees recession in the data. "The forecast is, we will see a recession," she says. "Our leading economic indicators suggest that it's happening right now."

Peterson says she's looking at housing permits, consumer confidence, manufacturing data, factory orders and consumer spending, among other things. And a lot of those indicators are hinting at a recession.

Peterson points to the tens of thousands of layoffs we've seen this year; the rising price of basics like food, electricity and gas; the rising credit card debt we're seeing; and the fact that consumers spent less than expected during the all-important holiday shopping season.

"Businesses are very forward looking," Peterson says. "And if they get a whiff of weakness ahead, they're gonna pull back."

Pulling back means businesses don't expand, don't buy new equipment or build new facilities, and they slow down hiring.

Peterson says a recent Conference Board survey of CEO's found that they overwhelmingly expect a recession.

Silver-lining recession

The good news? Although Peterson says it looks like we are in or about to be in a recession, she predicts it will be a mild one.

The reason? Because it was so difficult for companies to find workers for so long they aren't planning to lay people off like they might in a typical recession. So this recession might not look like other recessions.

"You can have a recession, but not have huge spikes in unemployment," she says.

The case for a soft landing

Or there may not be a recession at all. Justin Wolfers, an economist at the University of Michigan, says all of the recession talk he's been hearing seems absurd to him.

"You're talking to an economist who is going be happy to tell you that I see really good things," he says.

Wolfers sees a soft landing in our country's future: Demand for stuff might drop off a bit — enough to get companies to lower prices and bring down inflation — but not enough that they'd be losing a bunch of money and start shrinking significantly.

The reason for Wolfers' optimism? Jobs.

"Right now we're celebrating unemployment being at a 50-year low, at 3.4%," he says. "These are levels that earlier generations of economists had said was impossible."

Not only that, Wolfers points out that this kind of job growth is almost miraculous after what the economy went through just three years ago at the start of the pandemic.

"If I go back to March of 2020, as the world was closing down and unemployment was spiking to rates not seen since the Great Depression and if you had said, 'In three short years, we'll yield an unemployment rate you've never seen before,' I wouldn't have believed you."

Wolfers says jobs data is simply the most crucial and most telling data in an economy. After all, when the unemployment rate is low, people feel confident they can find a job if they need to: they spend, they invest, they ask for raises.

Also, Wolfers says, as jobs were booming, inflation has been falling: it's dropped from more than 9% to about 6%. The soft landing, he says, has landed.

Keep on spending

Another promising sign that we might achieve a soft landing comes from the all important consumer (that is, us).

Consumer spending (aka, us buying stuff) makes up nearly 70% of the entire U.S. economy.

When consumers spend less, the whole economy slows down. And the latest numbers show that consumers spent at a very brisk pace in January.

Six of one?

But economist Raghuram Rajan thinks recession versus soft landing might be asking the wrong question.

"There may not be that much difference between a soft landing and a mild recession," he says. What we really need to look out for, he says, is the danger of a major recession.

Rajan's worry stems from the jobs market and the idea that companies are holding back from laying people off because it was so hard to find those workers in the first place.

Rajan is concerned that if layoffs do get rolling companies will start to relax about finding people to fill jobs, and things might change really fast.

"If firms look around and say, 'Hey, it's not that difficult hiring anymore and we're holding onto these people... Why don't we clear the deck also,' and everybody gets that idea at the same time. We could see hundreds of thousands of people lose their jobs all at once," he says.

Rajan compares this risk to the old Wile E. Coyote cartoons. "He's run off the edge of the cliff, but he hasn't realized it and then he looks down, realizes he's over the cliff, and he falls."

Show me the data...

One thing is for sure: the economy is in a strange place. Some data shows an economy thriving and some shows signs of a troubling slowdown.

"The economics we learn in school is neat and clean," says Dana Peterson. "It doesn't assume that you have shocks or labor shortages. Those are weird things that economic models can't always handle."

"There's just a lot of uncertainty right now and the key thing we need is information and unfortunately, that means waiting."

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