A story in charts: is the US economy heading for a “soft landing”?

Central banks have historically struggled to lower inflation without a recession. They have either raised interest rates too high (curbing inflation but crushing the economy) or not raised them high enough (and failed to bring inflation under control). Will the Federal Reserve get it right this time round?

Soft landings have been rare

US economic history is littered with recessions. Not all of these have followed central banks raising interest rates to cool the economy – but many of them have. By contrast, soft landings – when the Fed raised interest rates without triggering a slump – have been rare. By our count, there have been just three over the past 70 years.

As rates rise, recessions are more common than soft landings

Federal Reserve monetary policy rate (%), recessions (shaded areas) and soft landings (magenta diamonds)

^{Source: Refinitiv Datastream}

Inflation still above target, but on the right track

Headline US inflation has come down from a peak of just over 9% in mid-2022 to just above 3% at the time of writing. The fall in core inflation, which strips out more volatile elements like energy and food inflation, has been less dramatic but it is still moving in the right direction. Recent oil price rises could mean headline inflation starts to rise again – meaning all eyes will be on core inflation over the coming months.

The labour market remains strong but is cooling

One of the key drivers of recent inflation has been the strength of the jobs markets. When the number of job openings exceeds the number of available workers, wages tend to rise – pushing overall inflation higher. At times last year, the US economy had two job openings for every unemployed person. That number had fallen to around 1.6 by August. Even so, the unemployment rate remains low, helping to support consumer demand.

Survey data does not point to an imminent recession

To get a sense of where the economy is heading – rather than where it has been – economists often turn to economic surveys. The most widely followed, run by the Institute for Supply Management, group together services and manufacturing sectors. Readings above 50 tend to be associated with expansions and below 50 with contractions. The latest data for the US suggests that manufacturing has been under pressure over the past year – but may now actually be turning the corner. The far larger services sector remain solidly in expansion territory and may also be trending higher.

^{Source for all: Refinitiv Datastream}