Economic data are mixed. While negative growth indicators are being reported for the euro zone, there are weak signs of stabilization in China. In contrast, the USA stands out with positive data. Gross domestic product is expected to grow particularly strongly in the third quarter. The model estimate of the Federal Reserve Bank of Atlanta holds at a quarterly growth of 5.7% extrapolated for the year. Last week, inflation-adjusted personal consumption growth in the month of July stood out with a monthly reading of 0.6%. This compares with a long-term figure of 0.2%. But it is the improvements on the supply side of the economy that have boosted hopes for a soft landing.
How do you define a “soft landing”?
This scenario describes a development in which inflation falls without a significant increase in the unemployment rate. This is possible if there is an improvement on the supply side of the economy. In principle, this primarily means more workers (higher labor market participation) and higher productivity growth.
Demographic trends (aging), the pandemic (supply chain problems and labor shortages), the war in Ukraine (energy and food shortages) and, more generally, deterioration at the geopolitical level, especially between the U.S. and China and the West and Russia (friend- and nearshoring, protectionism) have led to multiple, simultaneous supply-side deteriorations. Each of these shocks has an inflationary effect. This has amplified and prolonged the inflationary effects of the extremely expansionary measures of monetary and fiscal policies at the beginning of the pandemic (helicopter money).
Rising participation rate in the US
At present, the labor market in the USA, as in many other countries, is very tight. The unemployment rate is very low and the number of job vacancies very high. At the same time, productivity is stagnating. Now, in the month of August, the labor market participation rate for those over 16 years old increased to 62.8% from 62.6% in the previous month. Thus, the value has further approached the pre-pandemic value of 63.3% (February 2020). The low point was reached at 60.1% in April 2020. For the 25-54 age cohort (prime age), the participation rate has already been above the pre-pandemic value since February (February 2020: 83.0%, August 2023: 83.5%).
Rising unemployment rate without recession
The unemployment rate rose to 3.8% in August from 3.5% the previous month. Normally, this would be a worrying trend. In the past, when the unemployment rate has started to rise from a low level, such a tendency has continued quickly and strongly, eventually leading to a recession. This dynamic is summarized by the Sahm Rule, developed by economist Claudia Sahm. This time, however, the increase in the unemployment rate was caused by an increase in the participation rate rather than a decrease in employment. Employment growth (Nonfarm Payrolls), while falling, is still good at 150 thousand per month (latest three-month average). Overall, the data so far describe an easing in the labor market without a recession.
Fewer job vacancies
Furthermore, a report on job vacancies (JOLTS report) has shown a further decline. In the month of July, job vacancies fell to 8.8 million. This figure is still significantly higher than the number of unemployed (5.8 million in July). However, in March 2022, the labor market imbalance was even greater (12 million job openings versus 6 million unemployed). The so-called Beveridge curve, which describes the relationship between supply (unemployed) and demand (vacancies) on the labor market, indicates a gradual easing with a labor market that is still tight at the same time.
Strong pandemic-related distortions have occurred in productivity. In Q2 2023, the level of labor productivity was still at the same level as in Q3 2020, but the 3.7% (annualized) quarter-on-quarter increase in Q2 to a still 1.3% annualized increase is encouraging. The surprisingly strong indicators for GDP growth in the third quarter point to a further increase in productivity.
This time it could be different
In summary, the statistics (probability) still suggest a hard landing (recession) for the economy. In the past, hefty rate hikes have just often triggered a recession. However, the rising participation rate, falling job openings accompanied by only a slight increase in the unemployment rate, and higher productivity are encouraging signals for a soft landing of the economy.
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Prognoses are no reliable indicator for future performance.