Even a Soft Landing for the Economy May Be Uneven.
One of the most significant economic tales of the past year was the complicated debate about what it was the U.S. economy was going into a recession , or just declining, with some altitude sickness, after the peak of growth following the pandemic’s lows.
In the coming year, these arguments and questions will likely to persist. It is known that the Federal Reserve has been steeply increasing the cost of borrowing for companies and individuals in an effort to limit spending and reduce inflation.
However, the consequences are still affecting the commercial sector and budgeting for households. Therefore, the majority of banks and credit agencies are expecting that there will be a recession in 2023.
However an emerging generation of economists as well as major market participants see a strong likelihood that the economy will stay out of recession or at least the occasional slowdown in growth as cooler consumption and lessening of the effects of the pandemic help inflation gradually rise to more bearable levels, an optimistic result that is often referred to as”soft landing.
“The possibility of getting a soft landing is greater than the market believes,” said Jason Draho, an economist and director of Americas asset allocation at UBS Global Wealth Management. “Inflation has now come down faster than some recently expected, and the labor market has held up better than expected.”
It is likely that, even if a soft landing does happen the landing will be smoother for certain businesses and households and more rocky for others.
In late 2020 and the beginning of 2021, the idea of the possibility of a “K-shaped recovery” took root and was sparked by the early recession’s rift between safe remote workerswho’s savings, home prices , and portfolios soared – -as well as the millions of people working in a variety of risky or shaky job opportunities in person or dependent on a massive, yet sluggish unemployment assistance system.
The US Could Help Solve its poverty problem with a Universal Basic Income
If 2023 is an easy landing, it may be K-shaped, too. The negative effects are more likely to affect more by small-scale businesses that are cash poor and workers who are not boosted by the savings and bargaining power they accumulated during the epidemic.
In any event there is more volatility to come with a relatively low rate of unemployment. the high rate of inflation and a shaky economy continue to coexist in unison.
The generally healthy balance sheets of corporates and consumer credit may serve as a shield against the effects of fluctuating prices, global instability , and the end of the federal aid during the crisis.
CEOs of companies that serve financially sound middle-class and wealthy households remain optimistic about their future. Al Kelly, CEO of Visa the company that offers credit cards told the press recently”we are seeing nothing but stability. “we are seeing nothing but stability.”
The Fed’s forecasts show that 1.6 million people may lose their jobs before the end of this year. And the unemployment rate could rise to a level that has always been followed by recessions.
“There will be some softening in labor market conditions,” Jerome Powell, the Fed chair, told his latest news conference, outlining the reasons behind the central bank’s recent reluctance in increasing rates. “And I would like to see an entirely painless method to ensure price stability. It’s not possible. This is the best we can do.”
"Even a Soft Landing for the Economy May Be Uneven" https://t.co/QBieaFSFVx pic.twitter.com/EcscCDcMOr
— Brandy News (@Brandy_Shp) January 6, 2023
Does the bottom 50% slide back?
In the past two years, research has frequently reported that, on an average, those earning lower wages have seen the biggest pay increases and have seen increases in their compensation that have often surpassed inflation, particularly for those who changed jobs. However, these gains are not absolute and often a rise from low-level baselines.
Based on the Realtime Inequality tracker, created by economists from the University of California, Berkeley The inflation-adjusted income of the lowest 50% of adults in working age increased 4.2 percent between January 2019 through September 2022.
In the top 50 percent the income was lower than inflation. However, that doesn’t take into consideration the fact that the median income of the bottom half of the population in 2022 was $25,000 -approximately a $13 per hour wage.
“As we look ahead, I think it is entirely possible that the households and the people we usually worry about at the bottom of the income distribution are going to run into some kind of combination of job loss and softer wage gains, right as whatever savings they had from the pandemic gets depleted,” said Karen Dynan, a former chief economist at the Treasury Department and a professor at Harvard University. “And it’s going to be tough on them.”
Consumption accounts for about 70% of the economic activity. The enduring resilience of consumption over the last year, despite the high inflation and low business confidence was mostly due in part to the financial savings households of all types have accumulated during the epidemic that included a $2.3 trillion pot of government aid, less expenditure on services in person and the benefits of mortgage refinancing, and the cash-out of stock gains.
The rest of the stockpiles is distributed among households with more wealth.
The majority of major U.S. banks have reported that their checking balances are higher than the levels of prepandemic across all income levels. However, prices for living are more than in the year prior across the nation.
In addition, the savings of those in the lowest third of earning households could be able to continue to decline while prices for rent and daily expenses remain on the rise, though slower.
The majority of economic indicators are presented as “real” terms, subtracting inflation from the changes in the individual’s income (real increase in wages) and the total production (real Gross Domestic Product, also known as GDP).
If inflation calculations by the government remain as low as the market expects, these numbers that are adjusted for inflation could turn positive, making the declining economy appear more healthy.
This erratic dynamic could result in an uneasy tension between robust-looking official statistics and the mood of consumers who could have to deal with a lack of savings.
Small businesses are at risk of getting behind?
Another reason for an inclination like a K could be the pressure on small-sized businesses, who are less flexible than larger businesses when it comes to managing their costs. Smaller companies are also more likely to be impacted due to the restriction on credit, as lenders become more cautious and more expensive than they were one year ago.
In a survey conducted in December of 3252 owners of small-businesses by Alignable which is a small-business-focused network that has 7,500,000 members. 38% of them said they had an entire month cash reserves, an increase of 12 percentage points over one year ago.
A number of landlords who were gentle in regards to payments at the time of the epidemic have stepped up their game and are now asking for rent back as well as increasing the rent they are paying at present.
Contrary to large-scale companies that have secured low-cost long-term financing by selling corporate bonds, small companies tend to finance their payrolls and operations using the combination of cash in the bank as well as business credit cards or loans through commercial bank.
The rise in interest rates has caused the two other financing options more costly which could be a source of trouble for businesses that might require an additional credit line in the near future. Cash flow inflows depend on the strength of sales which is a major concern for the vast majority of.
An Bank of America survey of small-business owners in November revealed it was “more than half of respondents expect a recession in 2023 and plan to reduce spending accordingly.” For many entrepreneurs, making decisions to keep the business’s profitability could result in the reduction of personnel.
Certain businesses struggling with labor shortages, higher costs, and a slowing in sales have already decided to shut down.
Susan Dayton, a co-owner of Hamilton Street Cafe in Albany, New York, closed her restaurant in the fall when she noticed that the rising cost of essential ingredients and the staff turnover was no longer feasible.
Dayton said that the shortage of labor in small shops such as hers cannot be addressed simply by offering more money. “What I have found is that offering people more money just means you’re paying more for the same people,” Dayton declared.
This tension between the cost of staffing, profitability and growth of customers will be particularly acute for small businesses.
However, the same tension exists in corporate America as well. Certain industry experts believe that company earnings, which were soaring over the last two years, might decline, but not plummet as input costs are leveling off, and businesses able to keep their prices up regardless of sales slowing.
This could limit the majority of layoffs to workers with lower value as companies shrink and certain industries that are prone to interest rates, such as tech or real estateoffering another possibility to a comfortable, but unbalanced and uneven landing.
The biggest obstacle to overcome is the fact that the earning capacity of one individual or company is the expenditure of an additional.
The people who think that inflation is manageable without a major collapse in the labour market are hoping that spending slows enough to slow prices but not enough that employers cut back on employees — who may then cut back on spending, which could trigger the vicious cycle.
What are the odds of landing on a soft surface?
If the straining U.S. economy is going unravel rather than unwind it will require multiple realities that are double-edged to be resolved in a positive manner.
In fact, many retail analysts in the industry believe that the Christmas season could be the last chance for the spike in pandemic-era purchases of products. Certain consumers might be feeling satiated from their spending spree while others become more cautious when they shop, avoiding at the higher cost.
It could dramatically reduce companies’ “pricing power” and reduce inflation related to products. Companies that specialize in service could be affected as well. The same thing could cause layoffs because slowdowns in demand decrease requirements for staffing.
In the next few months in the coming months, it is likely that the U.S. economy will be heavily influenced through geopolitics within Europe and the coronavirus that is circulating in China.
Changes in prices that some researchers refer to as “systemically significant prices,” like the ones for utilities, gas and food, are likely to occur. People who are planning for a downturn by reducing their investments or spending may result in the creation of one. There is no way to know how much the Fed will take the next step in raising interest rates.
But, the risks could be quite harmless.
“It’s fifty-fifty, however you have to pick one side, don’t you think? Therefore, I choose the option of not having a recession” stated Mark Zandi who is the chief economist at Moody’s Analytics. “I can make the case on either side of this pretty easily, but I think with a little bit of luck and some tough policymaking, we can make our way through.”