(Bloomberg Businessweek) -- Having boomed its way through 2023, the US economy is coming back to earth.
Companies are hiring fewer workers. Consumers are spending less. The housing market is all but paralyzed by the highest interest rates in decades. Manufacturing is struggling, with the exception of sectors benefiting from government incentives, such as semiconductors and electric vehicles. And even as inflation slows, business and households continue to complain of a sting from high prices.
Yet unlike most slowdowns, this one is playing out as a textbook soft landing—the rare and difficult feat of slowing the economy without causing a recession. Inflation has cooled without a huge increase in unemployment, retail spending has cooled but not collapsed, and the economy continues to grow. In Bloomberg’s latest survey, economists see a 30% chance of a downturn in the next 12 months, compared with 60% in the survey a year ago.
Figures due out Thursday are expected to show the economy grew 2% in the second quarter. After the 1.4% growth of the previous quarter, that would be the slowest consecutive quarters of growth since 2022.
The question now is how much will the economy decelerate and for how long?
“Right now we are still on a path for a gradual moderation,” says Sarah House, senior economist at Wells Fargo & Co. “But there are still a lot of questions around, do things change more quickly than expected?”
The shift in conditions is evident on Main Street and on factory floors. Suresh Krishna, who runs Northern Tool + Equipment, a family-owned company in Burnsville, Minnesota, which makes and sells products that include compressors, pressure washers, water pumps and assorted gear, says business remains good. But he has also noticed that customers have become more discerning.
“Whether it be a trade professional or a consumer, they are watching their wallet,” Krishna says. That’s especially evident for bigger ticket items that retail for more than $500. “They are kicking the tires a lot more than they have in the past.”
In New York, Avremy Scheinfeld, who runs Abe’s Corner, a kosher restaurant and bar in Brooklyn, is having to trim staff hours because high interest rates on his credit card debt are biting into his bottom line.
“The economy is rough right now, everything is expensive,” Scheinfeld says. “If I increase prices, it will push away my clients. It’s hard.”
Observations such as those are in sync with recent data that show a clear softening trend.
Hiring and wage growth stepped down in June while the unemployment rate rose to the highest since late 2021 (though it remains historically low). “When one looks at unemployment, that clearly shows things have cooled considerably,” says Bloomberg Economics’ Anna Wong, who expects the jobless rate to tick up from 4.1% to 4.5% by yearend.
Also in June, economic activity in the services sector by one measure contracted at the fastest pace in four years. Data released July 12 showed consumer sentiment diving to the lowest level in eight months as high prices continued to weigh on Americans’ views of their finances and the economy.
In the housing market, mortgage rates have been hovering around 7%—more than double what they were three years ago—holding back construction of single-family homes and keeping prices high.
In the Federal Reserve’s latest Beige Book, a collection of anecdotes and commentary on business conditions, almost half of the 12 Fed districts cited flat or declining activity.
“It’s an unusual slowdown,” says Gregory Daco, chief economist at EY, the accounting and consulting firm. He says employers appear less inclined to reduce head count because worker shortages are still fresh in their minds. He thinks that could change quickly, though, especially if interest rates stay high. “Could this turn into something worse? That’s certainly a risk. We’re navigating uncharted waters when it comes to the post-pandemic labor market.”
In a hint of what’s ahead, Fed Chair Jerome Powell on July 15 said second-quarter economic data have provided greater confidence that inflation is heading back to the central bank’s 2% goal, possibly paving the way for interest-rate cuts.
“The US economy has performed really remarkably well,” Powell said during a July 15 appearance at the Economic Club of Washington DC. Wall Street traders have responded to the softening data by ramping up their bets for three rates cuts this year instead of the two they had been expecting.
Red flags are popping up here and there. Households have added $3.4 trillion in debt since the pandemic, and some are struggling to make payments. “Credit card delinquency is on an upward trend, and the rate at which auto loans are transitioning into delinquency is at a 13-year high,” Fed Governor Lisa Cook said June 25 at a speech in New York. “These rates are not yet concerning for the overall economy but bear watching.”
At Florida-based Blue Compass RV, expectations for several rate cuts this year had stoked hopes for a revival in recreational vehicle demand ahead of the spring and summer driving season, says Jon Ferrando, founder and chief executive officer of Blue Compass. Instead, an unexpected burst of inflation in the first months of the year led the Fed to keep rates steady.
“Right now we are in a slowdown period. We have been in it for two years, and I don’t see us coming out of it in 2024,” says Ferrando. “I don’t necessarily see significant Fed rate cuts, and if we have a divisive political election that will weigh on consumer sentiment.”
Some liken the current moment to the mid-1990s, another period when the Fed managed to nail a soft landing, despite traditional harbingers of a recession—such as a contraction in the money supply and persistently weak readings on manufacturing orders. The economy kept growing for another five years, until the dot-com bubble burst. In a research note titled Breaking the Rules, Morgan Stanley’s chief global economist Seth Carpenter questioned whether the signs of a slowdown in the economy are anything more than that.
“I don’t know that we have a half-decade of expansion to go,” he wrote. “But for now, we need to see other indicators to change our minds.”
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