Macroscope

Talk of a soft landing for the US economy is still just based on hope

A sense of optimism has returned as investors are increasingly convinced it is possible to tame inflation without triggering a recession

But painless deflation is rare, and policy lags mean the full impact of aggressive rate increases have yet to bite

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A “now hiring” sign on the window of a FedEx office in Washington on July 7. According to the Labour Department, the US economy added 209,000 jobs in June, far fewer than the predicted number of 240,000 jobs. The unemployment rate fell to 3.6 per cent. Photo: EPA-EFE

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 4:30pm, 20 Jul 2023

This was the year China’s economy was supposed to spring back to life while the US economy succumbed to recession. As the second half of 2023 gets under way, it is China that is underperforming disquietingly and the United States that is beating expectations.

“Double dip” has become the most frequently used term to describe the performance of China’s economy, which grew by a paltry 0.8 per cent last quarter compared with the first three months of this year. Sentiment has deteriorated dramatically, with the CSI 300 index of Shanghai and Shenzhen-listed stocks having slipped into negative territory for the year.

In the US, on the other hand, there is a palpable sense of optimism about the economy’s ability to surmount the two biggest challenges it has faced since the Federal Reserve began raising interest rates aggressively early last year: high inflation and a sharp, policy-induced slowdown.

The publication of data on inflation on July 12 provided ammunition for investors betting on a “Goldilocks scenario”, whereby prices drop to sufficiently low levels without causing a recession. Headline inflation in June fell to 3 per cent year on year, down from more than 9 per cent a year ago and the smallest increase since April 2021. Even “sticky” core inflation – which strips out volatile food and energy prices – dropped to 4.8 per cent.

Furthermore, the publication on July 7 of a solid employment report showing that the unemployment rate fell to 3.6 per cent last month while wages grew by a stronger-than-expected 4.4 per cent underscored the persistent resilience of the US labour market in the face of the fastest rise in borrowing costs since the early 1980s.

This has increased the likelihood of a “soft landing” for the US economy, a scenario that seemed unlikely even a few weeks ago, given the Fed’s determination to continue tightening policy. Markets are now looking beyond the near certainty of an additional rate increase at the Fed’s policy meeting next week and expect the central bank to cut rates next year.