How Businesses and Households Can Prepare for a Soft Landing or a Recession

Together with a plethora of other recent economic statistics, the strong hiring indicated in Friday's employment report for November is raising expectations that the U.S. economy will have a "soft landing" next year as opposed to the much-feared recession.

If the economy slowed down sufficiently to bring inflation down to the Federal Reserve's objective of 2% without plunging into a severe recession, this would be referred to as a "soft landing."

In an attempt to control inflation and rein in borrowing and spending, the Fed has hiked its benchmark interest rate significantly. There is a chance that the Fed will make a mistake, maintain its benchmark rate, which influences a lot of corporate and consumer loans, too high for too long, and ultimately trigger a recession.

Fed's Pursuit of Gentle Landings, the Shadows of Recession

In the past, when inflation spiked or threatened to spike due to a surge in economic growth, the Fed's officials frequently attempted to orchestrate gentle landings. The Fed has failed most often.

Even at a slower rate, companies would probably continue to hire during a soft landing. As the economy is affected by the Fed's high interest rates, job growth may slow. Many analysts predict that growth will slow down to around 1% in the upcoming year from roughly 2.4% this year.

However, things get far worse during a recession. Every year, employers lay off millions of workers. Even during a moderate recession such as the one that struck in 2001, the rate of unemployment exceeded 6%.

Price rises should progressively slow down to an annual pace of around 2% during a gentle landing. That does not imply that the price of basic essentials would decrease; in fact, foodstuffs have increased in price by nearly 25% since the epidemic began. However, salaries ought to keep rising over time in order to increase Americans' purchasing power.

On the other hand, inflation would most likely decrease more quickly during a recession. This is because there would be less spending and businesses would have to lower their prices to offset the loss in demand. Fortunately, few experts predict that "stagflation," which occurred in the 1970s when even recessions couldn't stop inflation, will recur next year.

Next year, the Fed will probably lower its key rate when inflation approaches 2%. That ought to lower the price of a company, vehicle, or home loan. However, borrowing rates would probably not decrease from their pre-recession levels during a gentle landing. This is due to the fact that the Fed would probably lower its key rate significantly more during a recession.

Whether interest rates will return to their extremely low pre-pandemic levels, when the average 30-year mortgage rate periodically dropped as low as 3%, is a major worry for the economy's future. Some analysts predict that low interest rates will persist due to an aging population, weaker growth, and increased demand for Treasury bonds and notes abroad.

Forecasting Economic Trends

Some analysts predict that rates will remain higher than they were before to the epidemic because of the large government budget deficits in the United States, a move away from globalization, and possibly quicker growth.

After three quarters of decreases, S&P 500 businesses' profits increased by 5% in the third quarter. According to a poll conducted by data analysis firm FactSet, experts generally believe that in 2024, earnings would likely reach a record level as a result of a robust economy.

However, profits and stock values usually decline during a recession. JPMorgan analysts state that "a U.S. recession next year remains a live risk" and that a decline in consumer demand as well as businesses' incapacity to maintain pricing increases may cause corporate profitability to worsen.