Jerome Powell aims to have a soft landing for the US economy as interest rates continue to rise. Janet Yellen sees Powell needing some luck to make a soft landing happen!📉

A classic gif that is relevant to the economy is always a fantastic way to kick things off!

Soft landing

If you have been in finance for awhile, you’ve most likely heard the term “soft landing”. Can the Fed put the US economy in a soft landing? Possibly!

A soft landing, in economics, is a cyclical slowdown in economic growth that avoids recession. A soft landing is the goal of a central bank when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a severe downturn. Soft landing may also refer to a gradual, relatively painless slowdown in a particular industry or economic sector. -Investopedia

Rates have been on a dramatic rise since the beginning of 2022. After coming out of a trough of low rates, the Fed has been on an aggressive path to kill inflation that has wreaked havoc on the US economy. We have touched on the transitory theme the Fed was pushing back in 2021. Nothing about the parabolic rise in prices was transitory.

The current EFFR sits at 2.5% after their July 75bps hike. I have briefly touched on Central Policies before & the importance. In a recent FS article I have talked about the USD continuing to see strength against ROW. Jumping back to the US/Fed.. At the upcoming Fed meeting, its very clear we will see a hawkish Fed continued.

There has been a lot of talk about OER(Owners Equivalent Rent) & how it lags in the consumer price index. Outside of rent prices, we are still seeing inflation rising to historical levels & of great magnitude. Another reason, I don’t see the Fed slowing down yet.But this is really interesting because we can now talk about if their is a soft landing.

Let me down easy

Since we all understand what a soft landing entails, lets take a look at some data.Mortgage rates for 30-years have now reached record levels in the US economy.

These levels are now fast approaching 2008 GFC levels. We have to understand the ripple effect this has on an economy. If the number of new home sales slows, this can create turmoil in other sectors. Housing can be a leading indictor of economic health. If less people are looking to build homes or purchase homes this can carry over into:

Construction

Historically, construction spending is not as low as it has been. We have seen spending in deeper negative territory. The less new homes built or sold means less work on the construction side of the economy(construction suppliers, equipment, roofs, paint etc)

Construction Spending(blue) has correlated with dips in the S&P500

If rates continue rising do we see a construction spending decline even further?

Manufacturing

Industrial production seems to be holding up alright. It shouldn’t be a wild surprise to see growth unsustainable during the post-COVID era.

Unless there is a turning point in rates & a valid reason to ease off the brakes, I do not see much of a reason why the industrial side of the US wouldn’t see further decline. Again, I am always flexible with how I interpret data. Its important as a trader/investor.

Industrial Production(blue) and EFFR

Inflation is close to 2x that of 2008.

Consumers

Consumer sentiment has recovered slightly & looking at business confidence has short term bottomed out. Not saying we move higher here but it is something to keep an eye on. Consumer spending as also held up fairly well despite everything going on. A case could be made that stimulus money lingered around in consumers savings to help with higher prices, but it is starting too look like we could be topping out.

If rates continue to push higher or the Fed surprises with a 100bps move, this could send a fairly big shock into markets. This would most likely further accelerate housing decline, increased mortgage rates and dampen spending.

To conclude..

Growth in the US has moderately slowed and should not be a major surprise with the catalysts at hand. The US compared to the ROW is doing well, and holding up.

A soft landing is possible in my opinion but will be dependent on how aggressive the Fed gets.In other countries, like the EU, UK, there are zero signs of a soft landing as many of the countries have drastically slowed. Rates have continued to rise in the UK as the consumer was already taking a massive hit. Similar with the EU countries. Though these economies were directly impacted by the Russia/Ukraine war.I will cover EU & UK at a different time.

Cheers,FS