End of the 'Atmosphere Recession'! Is the United States really heading for a soft landing?

For months, economists have been working to address the disconnect between strong economic performance and people's poor perception of their own financial situation.

Now, Michael Pearce, Deputy Chief Economist for the United States at the Oxford Economics Institute, suggests that there is evidence that the so-called "atmosphere of recession," which refers to people's enduring negative emotions about the economy, seems to be ending.

In a report released last Friday, Pearce wrote that with inflation cooling down and the Federal Reserve preparing to cut interest rates, Americans' assessments of the future are improving, aligning the country's economic conditions with consumer confidence.

Other economists have also noticed a recent "optimistic" outlook.

Brett House, an economics professor at Columbia Business School, said, "Consumer confidence seems to be catching up with the economy, gradually moving towards the middle ground."

However, Pearce wrote in his report that it is difficult to determine what caused this shift in sentiment. He wrote:

"Our most likely explanation is that people are reacting with a lag to the news that inflation is falling and seems to be continuing to fall to 2%. This may also reflect an enhanced optimistic sentiment about the future as the Federal Reserve embarks on a clear path of interest rate cuts."

Recent economic data has paved the way for the Federal Reserve's first cut in benchmark interest rates in years.

The Federal Reserve's preferred inflation gauge, the PCE price index, rose 2.5% year-on-year in July. Despite the unemployment rate rising over the past year, it remains low at 4.2%.

Greg McBride, Chief Financial Analyst at Bankrate.com, said, "All signs indicate that inflation is continuing to improve, and it is expected that the CPI data to be released on Wednesday will show further easing of inflation pressure."

"Other inflation indicators—the PCE price index and unit labor costs—have been telling the same story and laying the groundwork for the Federal Reserve to start cutting rates this month," he said.

The CME FedWatch Tool shows that the market currently expects a 100% chance of a rate cut at the Federal Reserve's meeting on September 17-18, and more aggressive measures may be taken later this year.

"Achieving the Long-Awaited Soft Landing"

At the same time, the latest data shows that consumer spending is performing better than expected.

Jack Kleinhenz, Chief Economist at the National Retail Federation, said in the September NRF Monthly Economic Review released last Friday, "American consumers have been very resilient."

Kleinhenz stated that despite previous expectations of an economic recession, the United States has avoided a recession. He said, "The U.S. economy clearly has not fallen into recession and is unlikely to do so in the final stages of 2024. Instead, the economy appears to be on the edge of achieving the long-awaited soft landing, while achieving a dual cooling of growth and inflation." Columbia University's House stated that inflation is making progress, while the labor market has not deteriorated significantly, creating a "classic 'golden-haired girl' scenario."

Although there is still a group of "recessionists" who insist that a severe economic slowdown is imminent. However, an increasing number of economists now believe that this situation will not occur in the short term. Goldman Sachs recently lowered the possibility of an economic recession from 25% to 20%, after previously raising it from 15% to 25%.

McBride said, "In 2023, this camp is very crowded, and there are plenty of reasons, but the likelihood of a soft landing has been steadily increasing over the past 12 months."

Officially, the U.S. National Bureau of Economic Research defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months." The last time this happened was in early 2020 when the economy suddenly stagnated. In the last century, the United States experienced more than a dozen recessions, some lasting up to a year and a half.

House said, "The problem with recessionists is that they will certainly be right at some point. Of course, at some point in the future, the U.S. economy will fall into a recession."

House stated that some form of economic turmoil or adjustment occurs with a fairly regular frequency. Now, the upcoming U.S. presidential election and potential major policy shifts bring additional uncertainty. House said:

"Recessionists will eventually be right, but if a recession occurs several years later, it can hardly be considered a victory."