Soft landing[1]. This expression, conveying the concept of economic growth slowing but not tipping into recession, has been at the heart of the equity[2] market rally of the last few months. Combined with an assumption of rapid disinflation, it reflects the hope that one of the worst periods of inflation in 40 years and one of the most brutal cycles of monetary tightening ever seen will end without major damage. The concept of a soft landing has also been at the heart of debate, having been mentioned in close to 20% of Bloomberg articles in recent weeks. The expression had not seen this level of interest since 2001 and 2007, i.e. just before the last two economic recessions to hit the US (excluding the COVID-induced recession). Could this be more a sign of complacency than of rational optimism? That seems probable, based on fundamentals.
Numerous US economic indicators are hitting levels seen only during periods of recession or at the tipping point into recession. These include, to name but a few, the low proportion of industrial sectors still showing growth (30%), the collapse in construction permits (down 40% in a year) and the latest readings of the Philadelphia Fed’s Manufacturing Business Outlook Survey and of the Conference Board Leading Economic Index. Also worth highlighting is the probability of a recession in the United States 12 months ahead as estimated by the New York Fed on the basis of the yield curve – at its highest level since the 1980s.
