Analysts and investors are coalescing around the view that the U.S. Federal Reserve has tamed inflation without knocking the U.S. economy into a recession—creating a “soft landing”—and will end its series of interest rate increases, perhaps as soon as next month.
Inflation fell to 3 percent in June, within reach of the Fed’s 2-percent target. The economy grew at 2.4 percent in the second quarter, more than analysts had predicted.
A raft of economic indicators are on the rise. (See “U.S. Economy Grows Faster Than Expected in Second Quarter” in this issue.) Consumer sentiment is at its most positive since October 2021 in the University of Michigan’s most recent monthly survey.
Meanwhile, layoffs have been fewer than analysts expected.
Although parts of the economy show signs of slowing, the all-important labor market does not: companies are putting a priority on using their cash to keep workers on the job.
More than two-thirds of small business owners have pared back expenses in the past six months and plan more cuts that will include finding cheaper supplies and eliminating less profitable products or services, according to a June survey by Vistage, a business coaching service.
However, firing workers was not high on the list.
Those workers, in turn, are spending their paychecks and bolstering the economy, 68 percent of which depended on consumer spending in this year’s second quarter.
The data “should give us greater confidence that the Fed’s focal point on inflation will continue to slow, just as goods prices…are slowing and we can realistically get back to the 2-percent target without much further, if any, policy tightening,” ING bank economist James Knightley said to the Financial Times.
Many observers had expected history to repeat itself: that the Fed’s steady increases in rates would solve inflation by causing a recession. People would spend less, businesses would invest less, workers would lose their jobs, and prices would stop rising because the economy was unplugged.
In the Great Recession and the first year of the COVID War, massive layoffs were the norm. However, this year companies have brought on an additional 278,000 workers each month, despite stiff inflation and widespread forecasts of a recession to come.
Unemployment is now near a 50-year low.
“In part, it is this tightness in the labor market that probably should prevent the economy from falling into a more acute, longer-lasting recession,” economist Erik Lundh at The Conference Board, told The Wall Street Journal.
However, a recession of some kind is still possible.
Wages are still growing and outpaced price increases in the second quarter. Companies are still hiking prices to protect margins and profits. Oil prices are on the rise.
Employers are creating and advertising fewer new jobs, hiring fewer workers, and not competing as hard for those they do take on—all signs that demand for workers is softening.
Of key importance, core inflation, which screens out energy and food costs, ran at 4.1 percent in June. Although its lowest since September 2021, it remains twice as high as the Fed’s 2-percent target rate for inflation overall.
Recent good news “certainly supports the view that we’re in the midst of a soft landing,” Kathy Bostjancic, Nationwide Mutual’s chief economist, said to the WSJ, “but we’re still hesitant to declare that a recession is not in the cards.”
Also, Fed officials have said they want to see wage growth slowing and the labor market cooling before deciding on additional rate hikes. Whether the labor market has reached that point will be a judgment those officials make when they meet next month.
TRENDPOST: Corporate debt, particularly in commercial real estate, will be a key recession indicator.
As we have noted in our continuing coverage of our Top 2023 Trend, the “Office Building Bust,” the value of commercial real estate—especially office towers—is rolling downhill. Office landlords are battling with cities to have the assessed value of their properties reduced; some property owners already are defaulting on their debts; and banks are starting to sell their commercial real estate loans.
Banks are especially vulnerable.
At least $200 million in commercial real estate loans will come due this year and next. Small and regional banks hold a majority of that debt.
Many landlords will be unable to pay the principal and will need to refinance at rates much higher than their original loans carried. Many will be unable to find lenders willing to take the risk. Many others will simply walk away.
Banks already are trying to hoard cash against the prospect of more loans going bad. However, that will not be enough to save every bank and more will collapse or be sold. (See “Two More U.S. Banks Bite the Dust” in this issue.)
As loans fail and banks teeter, the U.S. economy will move closer toward recession.
The commercial Office Building Bust has just begun. The worst is yet to come:
- “THE NEW LIFE OF LOCKDOWN” (19 May 2020)
- “REMOTE WORK = COMMERCIAL BUST” (2 Jun 2020)
- “SLIDING VALUE OF OFFICE SPACE HITS URBAN CENTERS” (11 Aug 2020)
- “WORK FROM HOME, CITY REAL ESTATE DOWN” (20 Oct 2020)
- “COMMERCIAL REAL ESTATE IN A TAILSPIN” (20 Oct 2020)
- “OFFICE WORKERS STAY HOME” (8 Dec 2020)
- “RETURN TO OFFICES POSTPONED: COMMERCIAL REAL ESTATE BUST?” (14 Sep 2021)
- “WORKERS STAYING HOME, COMMERCIAL REAL ESTATE DISASTER LOOMING” (19 Oct 2021)
- “COVID WAR KEEPING WORKERS OUT OF THE OFFICE” (16 Nov 2021)
- “NYC BUSINESSES: BYE, BYE NYC” (16 Nov 2021)
- “DELOITTE ABANDONS MORE LONDON OFFICE SPACE” (26 Apr 2022)
- “GM SOFTENS BACK-TO-THE-OFFICE REQUIREMENT AFTER WORKER BACKLASH” (4 Oct 2022)
- “BUSINESS OFFICE BUST BEGINS TO BITE” (20 Dec 2022)
- “NEW YORK CITY’S WORKFORCE SHARPLY SHRINKING” (24 Jan 2023)
- “OFFICE OCCUPANCY HALF OF WHAT IT USED TO BE” (7 Feb 2023)
- “TOP TREND 2023, OFFICE BUILDING BUST: INVESTORS BACK AWAY FROM DOWNTOWN PROJECTS” (27 Jun 2023)
- “TOP TREND 2023: OFFICE BUILDING BUST, HSBC LATEST TO FLEE LONDON’S CANARY WHARF” (5 Jul 2023)
- “TOP TREND 2023, OFFICE BUILDING BUST: OREGON’S LARGEST CITY LOSING POPULATION” (5 Jul 2023)