The plane isn’t on the ground yet, but the approach has been uneventful, so far.
As tired as the metaphor might be, a “soft landing” is the best possible outcome of the Federal Reserve’s belated effort to defeat inflation. And the latest data suggests it could be happening.
The Fed will announce its next interest-rate move on Dec. 13, and there’s a good chance it will slow the pace of interest rate hikes with a half-point increase. That would follow four consecutive hikes of three-quarters of a point, one of the most aggressive tightening efforts in the Fed’s history.
The Fed is trying to push down inflation, which peaked at a 9% annualized rate in June. The inflation rate is now 7.7%, and probably headed lower. The next set of numbers comes out Dec. 12, one day before the Fed’s rate-hike announcement, and economists think inflation for November will fall to around 7.3%.
Economic forecasts aren’t always right, but there’s disinflationary evidence all around. Average U.S. gasoline prices have fallen to $3.32 per gallon, down from $3.80 a month ago and a peak of $5 in June. Natural gas prices, which determine electricity and winter heating costs in much of the country, are down 34% from their August peak.
Rent, the biggest portion of many household budgets, has been rising by more than incomes. But that may finally be reversing. The Zillow observed rent index dropped from September to October for the first time since 2020. Home values are turning, too, after an epic two-year rally, with the Case-Shiller home-price index falling for three months in a row. The last time that happened was at the end of 2011. Eventually, housing affordability will improve.
The Fed gets inflation down by using rate hikes to slow economic growth, so demand cools off and prices decline. But there’s substantial margin for error, and if the Fed hikes too much or too fast, it won’t just slow the economy—it will cause a recession. And recessions, almost by definition, cause the type of disinflation we’re seeing now in energy and rent.
So are prices moderating because we’re in a recession or headed for one? It doesn’t look like that now. Employment remains strong, with the unemployment rate at a super-low 3.7%. The stock market has shown a bit of life after bottoming out for the year in October. Bank of America says holiday spending might be a bit soft, but that’s partly because shoppers are spending less on goods and more on services, in a return to more normal pre-COVID spending patterns. “Consumer spending is softening but not rolling over,” B of A said in a Dec. 8 report.
Consumer confidence even ticked up, with the latest Univ. of Michigan index 4% higher than it was in November. Improving inflation was part of the reason. Consumers are also bullish about business conditions, which suggests they continue to feel solid job security.
President Biden may wish these trends were more clearly visible a few months ago, since a better economic outlook in late summer and early fall might have helped his Democratic Party hold onto the House of Representatives in the November midterm elections. Instead, Republicans took the House by a narrow margin. But Biden is still ending the year strong, and there’s more to it than just a few economic data points.
The Democrats’ Senate win in the Dec. 6. Georgia runoff election actually gives them one additional seat. The Dems flipped one seat in Pennsylvania and defended all others, a much stronger performance than most forecasters expected. The Democratic Senate will be an important bulwark against a Republican House eager to cause mischief for Biden during the next two years. Arizona Sen. Kyrsten Sinema shook things up this week by switching from Democrat to Independent, but that doesn’t seem likely to change Democrats’ control of the Senate or harm Biden’s agenda in any way.
The lame-duck Congress, still controlled by Democrats until the next session begins in January, just passed a same-sex “Respect for Marriage” act, which Biden will sign. It got some Republican votes, allowing Biden to now claim three major bipartisan laws enacted under his term, including last year’s infrastructure bill and the CHIPS+ Act he signed in August. Biden campaigned as a pragmatist able to work with Republicans on needed legislation, and he can plausibly claim to have upheld his claim to bipartisanship.
Many economists still think the economy will slip into a recession in 2023. A “hard landing” would be a harsh recession with a big jump in unemployment and all the problems that come with it. But companies may be reluctant to cut staff, even if profits suffer. Many businesses that have struggled…
Read More: This week in Bidenomics: Landing softly