The hope of a soft landing for the US economy heated up over the summer, but now signs and attitudes are shifting to be more negative again.
Even as interest rates skyrocketed over the past 18 months, a good job market and strong consumer spending kept the US economy moving. This had experts and investors feeling a bit more optimistic that inflation could be defeated without a recession.
In an August economic policy survey, the National Association of Business Economics found that 69% of business economists polled called a soft landing at least somewhat likely — up from 30% in March. Likewise, a July Bank of America survey found 68% of surveyed fund managers expected a slowdown in the economy without a recession.
In September, the Federal Reserve buoyed those hopes by keeping interest rates unchanged for the first time since the first quarter of 2022. However, as the month ends, the economy is facing some headwinds that could darken the skies over that brief sunny moment.
Over the summer, people felt good about the future of their money
Americans appeared to feel good about the future of their money by spending a lot of it over the summer, especially on experiences such as Taylor Swift's "The Eras Tour."
With the help of Swift's tour — and Beyoncé's "Rennaisance World Tour," as well as the "Barbie" and "Oppenheimer" movie premieres — we ended up in an economic era with a fitting nickname: "Goldilocks." That is, the economy was not too hot, not too cold.
This can be seen in the feelings of Americans toward the direction of the economy. Even though consumer confidence was down in August, the number of people who think a recession is somewhat or very likely in the next 12 months continued to drop since its 12-month peak in the spring.
There was a lag in feeling the pain of higher interest rates, but it's coming to an end
These sentiments could change in the coming weeks and months as pressure from several factors starts to mount on the American consumer.
JP Morgan wrote in a recent research note that the US might have been lulled into the mistaken belief that inflation could be defeated without a recession, "which has resulted in complacency and broad acceptance of the soft landing, or even no-landing, thesis," the authors wrote.
That could be because, as JPMorgan pointed out, the impact of the Fed's interest rate hikes has been delayed.
At the start of the rate increase, many borrowers, such as existing homeowners, had low mortgage interest rates locked in. Americans also had a large cash cushion at the time, were enjoying relief from student loan payments, and may have had pent-up demand for certain services after the easing of COVID restrictions.
As the economist David Rosenberg says, it typically takes six months for a recession to hit the economy after interest rates increase by this much.
Americans are being more cautious
Now, shoppers are starting to show signs that they, at the very least, know things are still not good and they are being more cautious.
People are spending less on non-essentials and big-ticket items at places like Costco. Even dollar stores are starting to feel the pressure of more measured spending after initially benefitting from inflation as wealthier people looked for more value.
And other factors are just going to make it worse.
A recent survey from Bloomberg Markets Live Pulse found that 21% of more than 500 investors predicted that personal consumption would shrink in the fourth quarter. A further 56% said consumption would reverse in early 2024.
Pandemic-era savings are running dry with record levels of credit card debt, student-loan payments are resuming, and we are about to hit the window for the delayed impact of higher interest rates. All of that adds up to a perfect storm of pressure on American consumers.
Gas prices continue to soar, and not only does that mean Americans have less money to spend elsewhere, it could cause inflation to reverse course and start to rise again.
There is also the pending government shutdown. The immediate impact would be volatility in the stock market and millions of government workers going without pay. In early September US Treasury Secretary Janet Yellen was optimistic about avoiding a recession but admitted a prolonged shutdown could increase the chances of a downturn.
And even though the public may have seen the Fed's decision to not increase interest rates in September as good news, there were other concerning details in the announcement. Fed Chair Jerome Powell hinted at rates staying higher for longer, sending stocks lower. The S&P 500 is on track for its worst month of the year, and some experts believe another rate hike is likely in November.
And while Powell said a soft landing is "possible," he also warned that it could be decided by factors "outside our control."
The good news is that Americans don't appear to be panicking, which would put even more pressure on the economy. The bad news is that maybe they should be more worried than they are.
