August Economic Market Update: Recession or Soft Landing?

Traditions Wealth Advisors
Greysen Golgert/Brien L. Smith CFP® ​
Economic Analyst Intern/Chief Investment Officer

Is a recession on the way? Or is this economy primed for a soft-landing scenario? Investment professionals are certainly optimistic that the global economy will manage to avoid a recession. According to an August Bank of America survey, 76% of global fund managers expect a soft-landing outcome in the next 12 months, 13% expect a recession, and ~8% expect the economy to keep chugging along without landing. While the results of this survey are encouraging, sentiment and expectations a year out will never be a reliable predictor. We only need compare the results of 2023 global fund manager surveys to the economic situation of today to find unmistakable evidence of sentiment’s inconstancy. However, the data informing these expectations is worth considering seriously. Correctly interpreting that data is a difficult and imperfect science, but consistently falling inflation and rising unemployment provide support for the soft-landing optimism. A recession—defined by the National Bureau for Economic Research (NBER) as “a significant decline in economic activity that is spread across the economy and lasts more than a few months”— remains a distinct possibility but seems to be in a state of perpetual postponement.

Financial markets endured a tough first week of August when the Sahm rule—an unemployment-related recession indicator—barely triggered, bringing recessionary fears to a fever pitch and the volatility index (VIX) to its highest peak since 2020. As those fears abated, the following weeks saw the longest rally of the year, with each major index regaining all of those losses. Markets recovered from that mini crash because the past data and future projections do not suggest an impending recession. GDP growth, perhaps the most relevant indicator for the NBER’s recession definition, has continued to demonstrate the resilience of a truly exceptional US economy. With 2.8% growth in Q2 and forecasts predicting 2% growth for Q3, there would have to be an extreme demand or supply shock to bring this economy into a recession. Another thing to consider is that retail sales surged upward 1% in the month of July, indicating the strength of the US consumer and propelling growth further.

​Despite the positive outlook, there are several points to touch on that may put a damper on the wave of optimism. For starters, unemployment is rising month over month, but this is not necessarily a bad thing. Even an exceptional US economy cannot sit above maximum employment for too long, and what we are seeing is a steady correction from historically low unemployment levels to a long-run average that will likely hover around 5%. Unfortunately, inflation is not at the Fed’s target rate of 2%. The PCE level, the Fed’s preferred gauge of inflation, has slowly ticked down to 2.5% year over year and it should continue to fall. However, with a September rate cut on the horizon we may see what John Mauldin of Mauldin Economics calls a “head fake.” Recently, there have been several times in this rate environment where inflation began trending downward only to fake us out by suddenly reversing course. Worries remain that excess demand caused by a rate cut may result in a head fake that pops inflation up to an undesired level. Businesses of all kinds are likely to jump on the opportunity to borrow at a lower cost, and the Fed is certainly considering the adverse effects on inflation that might bring. The Fed will almost certainly cut in September, and the debate now is between a 25 or 50 basis point cut. In his speech at the Jackson Hole Symposium, Fed Chair Jerome Powell signaled his acknowledgement of the need for change to combat a softening labor market. The Fed’s rate decision should lay the groundwork for the coming year, and hopefully set the economy up for a soft landing.

Sources:
Global markets weekly update | T. Rowe Price (troweprice.com)
A Head Fake, Maybe - Mauldin Economics
Dolls-Deliberations-Weekly-Investment-Commentary_081924_FINAL.pdf (crossmarkglobal.com)
https://www.nber.org/research/business-cycle-dating
https://finance.yahoo.com/news/investors-more-confident-in-soft-landing-as-fed-rate-cut-expectations-rise-bofa-survey