At the start of 2023, the debate among market participants revolved around soft landing versus hard landing, with the consensus firmly in the hard-landing camp; however, as the data continued to surprise to the upside, this gradually shifted to the soft-landing camp by year-end. As we move further into 2024, the debate seems to be shifting once again, this time to soft landing versus no landing, with concerns about a hard landing (mild or not) being pushed to the wayside. Yet, we find ourselves a little wary of this shift, with the continued view that it is still too early to completely write off the possibility of a mild recession in the coming year. In this report, we look at a number of inconsistencies in the economic data that suggest growth may not be quite as robust as depicted on the surface, and investors will want to be wary in their expectations.

Following the economic data surprises that transitioned expectations from a hard landing to a soft landing in 2023, economists are now again seeing growth surprise to the upside. This has pushed some economists to shift further toward the no-landing camp.

In our view, such a transition may be premature, with the risks of a mild recession not yet fully dissipating. For one thing, interest rates are still firmly in restrictive territory; and the longer they remain there, the greater the probability of growth starting to disappoint once again (even taking into account the probability of a slightly higher neutral r-star rate of interest). Hence, from this perspective, to the extent that this week’s inflation report might keep the Fed on hold for longer, doing so also raises the risk of a harder landing.

This week’s hotter-than-expected CPI report (the week of February 12) has seemingly added further momentum to the view that the economy is reaccelerating (the no-landing view) and to the accompanying belief that the data might be so strong that the Fed has to start raising interest rates once again. From our perspective, we agree there is not yet convincing evidence that the economy has already entered a recession, and a soft-landing is certainly still possible. However, there is plenty of evidence to suggest that growth is not nearly as strong as it seems to be on the surface and that it is already decelerating and could continue to do so in the coming quarters.

The list of concerning data includes:

  • Flat-to-negative earnings growth for most of the equity market, excluding the Mag 6
  • Decelerating hours worked, spiking layoff announcements, falling job openings, outright negative household employment growth
  • Soft and still negative real household income growth in many sectors (also evident in the continued strength of populist leaders across the developed world)
  • Weak business confidence and spending plans
  • Tighter expected credit conditions and tumbling bank profits
  • Deflation from China and recessions across many parts of Europe, with the U.K. just added to that list this week

In short, the U.S. economy has thankfully been incredibly resilient to date, but it would be wrong to believe that Fed policy is not restrictive and not having much impact on growth, and that there is no room for rate cuts in the coming year. Unfortunately, the data would also suggest that it would be too early to declare complete victory on the recovery and to remove the possibility of recession from the table. 

For more information on the research reports published by Richard de Chazal, please contact us or your William Blair representative.