Recent data suggests that the US economy is on track for a soft landing, with signs of cooling in the labor market and inflation. However, many Americans still feel that the economy is not improving due to inflation levels still being above pre-pandemic levels and a slowing job market. Interest-rate cuts, which could come as soon as September, may help improve the situation. Former Fed economist Claudia Sahm believes the Fed is the biggest risk to a soft landing. Despite the positive signs, some experts, such as French bank SocGen and UBS, still see red flags and predict a potential downturn.
Soft-landing hopes for US stocks received a boost following encouraging inflation data and a nod from the Federal Reserve (Fed) at progress made in fighting consumer prices. The S&P 500's march to record highs in 2024 has been driven by expectations for a soft landing, where the Fed tames inflation and eventually cuts interest rates while growth remains resilient. UBS economists reaffirm their outlook for a soft landing for the US economy, expecting the Federal Reserve to begin cutting interest rates in September. The labor market has returned to near pre-pandemic conditions, supported by a strong increase in labor supply. Retail sales and inflation are showing signs of moderation. The Fed kept rates unchanged at its June meeting, but UBS maintains its base case that the Fed will be in a position to cut rates in September as it receives softer data on growth, the labor market, and inflation. [c1e55098]
Pence Capital Management chief investment officer Dryden Pence predicts only one interest rate cut at the end of the year due to the robustness of the American economy. He highlights that the US has added 6.1 million new workers since the pre-pandemic period, which is equivalent to adding the entire labor force of Illinois or the entire GDP of France. Pence suggests that the Federal Reserve continues to move to the right in its stance due to the strong economy. [90798057]
Mohamed El-Erian, president of Queens’ College in Cambridge and a Bloomberg columnist, stated that the US economy is slowing faster than expected by both economists and the Federal Reserve. He pointed to the slowdown in the personal consumption expenditures (PCE) price index, which rose 2.6% year-over-year in May, the slowest pace so far this year. El-Erian believes that the Fed remains overly data-driven and takes a lot of historical data to make changes. While Fed officials have updated their forecast for an average of a quarter-point rate cut this year, El-Erian sees a 35% chance of a US recession and warns that the Fed risks keeping rates too high for too long. He believes that the most likely mistake is that the Fed starts cutting rates too early and ends up cutting them too much. U.S. Treasury Secretary Janet Yellen expressed confidence in the American economy and dismissed the possibility of a recession. El-Erian's concerns about the pace of inflation and the potential impact on the economy echo those of Federal Reserve Gov. Lael Brainard. Former U.S. Treasury Secretary Larry Summers has criticized the Federal Reserve's optimistic stance on inflation. [17f7a142] [b5c00af0]
Jay Hatfield of Infrastructure Capital argues that the US economy is 'weakening' for the first time in four years during an appearance on 'Mornings with Maria.' He predicts that this weakening will force the Federal Reserve to cut interest rates. [fff9d025]
According to a recent analysis by Real Investment Advice, the labor market in the US is near or back to pre-pandemic conditions. The Fed Funds rate is 3% above their extended forecast. The economy might continue to weaken, prompting recession calls. The Wall Street consensus is for smooth sailing ahead. Market performance tends to be stronger in the first half of the month and weaker in the last half. The percentage of stocks outperforming the S&P 500 is at a record low. Fed Chair Powell is generally dovish but not overly anxious to cut interest rates. Fed Funds futures imply an 83% chance the Fed will cut rates twice by year-end. [f5e2f7a5]
Guillermo Felices, global investment strategist at PGIM Fixed Income, believes that the gradual slowdown of the US economy is a positive development for the markets. He suggests that as inflation falls, the markets will be supported. Felices discusses the US economic outlook and the market implications of the Federal Reserve minutes. The strategist's views are based on the belief that a slower economy will alleviate concerns about overheating and excessive inflation. He argues that this will allow the Federal Reserve to maintain its accommodative monetary policy for longer, which will benefit the markets. Felices' perspective is that the US economy slowing down is a 'great thing' for the markets. [62e2c336]
Chicago Fed President Austin Goolsbee expressed caution about the economy, citing 'some warning signs the real economy is weakening.' He previously discussed the potential for a 'golden path' or soft landing but now sounds more cautious, saying it is 'still possible.' Goolsbee highlighted two charts that indicate a shift in the economy: the Bloomberg US economic surprise index, which hit a nine-year low after the ISM services number fell below consensus expectations, and the Atlanta Fed's GDPNow tracker, which has been cut in half to 1.5% for Q2 growth. More corporate commentary about a demand slowdown and the upcoming non-farm payrolls report will provide further insight into the health of the economy.
Investors are betting on the Federal Reserve cutting rates as soon as September, as recent data suggests a slowdown in the economy. The June jobs report is expected to show a slowdown in hiring, along with weak services and manufacturing data. Signs of lower rates have typically been accompanied by market rallies, with stock indexes tracking larger companies reaching fresh records. However, the Russell 2000 index, which tracks smaller companies, has remained flat. If the economic data continues to weaken, the Federal Reserve may consider cutting interest rates. Investors are forecasting two quarter-point cuts in September. The data suggests that the economy is losing momentum as we enter the second half of the year. [c45dba63]
The American economy is experiencing a disconnect between positive economic data and negative sentiment among Americans. Unemployment has been low and consumer spending resilient, but consumers remain skeptical due to high inflation and housing costs. However, there are signs that the economy is slowing and inflation is falling again, which could lead to the Federal Reserve cutting interest rates. The outcome of these economic trends will impact how voters perceive the economy and could influence the 2024 presidential race. Inflation is a major concern for voters, despite the fact that it has fallen significantly in recent years. Housing costs continue to rise, adding to voter skepticism. The strong job market has helped compensate for higher prices, with wage gains outpacing inflation. However, the overall sentiment remains cautious and uncertain. [df544d0b]