The U.S. economy is approaching what most economists had thought either unlikely or impossible: inflation returning to its prepandemic norm without a recession or even much economic weakness, a so-called soft landing.
“What we are expecting now is a soft landing,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics. “We expect the economy to weaken quite a bit but it does look like we’ll avoid an outright contraction” in gross domestic product.
If they’re right, it would be highly unusual. In the past 80 years, the Federal Reserve has never managed to bring inflation down substantially without sparking a recession.
The strong economic rebound following the pandemic pushed inflation to four-decade highs of 9.1% last year. In response, the Federal Reserve raised interest rates to a range between 5.25% and 5.5%, the highest level in 22 years. The Fed aims for 2% annual inflation using a different measure, the personal-consumption expenditures price index.
Yet investors seem prepared to declare victory, even if the Fed isn’t. Futures markets put roughly 65% probability that the Fed will begin cutting interest rates by May, according to CME Group data.
Meanwhile, other data over the past few weeks point to an economy that is still healthy.
Rather than slow down this year, growth has sped up, to 4.9% annualized in the third quarter, its fastest since the end of 2021. Economists expect growth to slow to around 1% in the final three months of the year and about 1% in 2024.
Meanwhile, over the three months through October, U.S. employers added an average of 204,000 jobs a month, a marked slowdown from earlier in the postpandemic period but still above 2019’s average of 163,000. The unemployment rate has ticked up to 3.9% but remains low by historical standards.
A big question is whether consumers, whose spending powered the recovery, can keep it up.
U.S. Retail Sales Fall for First Time Since March as Holiday Season Approaches
Spending declined in October at stores, auto dealerships and gas stations
By Austen Hufford Updated Nov. 15, 2023 8:46 am ET
Consumers spent less at stores, dealerships and gas stations last month, a sign the summer spending boom is cooling heading into the holiday shopping season.
U.S. retail sales fell 0.1% in October from a month earlier. That is the first decline since March and comes after a 0.9% increase in September. Declining retail sales, combined with slower hiring and easing inflation indicate that the economy is cooling after surprisingly strong growth much of this year.
Americans spent less at auto dealerships as higher interest rates could deter some from making big-ticket purchases. Gasoline purchases also fell, as declining prices at the pump resulted in less spending at gas stations. Sales also declined at department, hardware and furniture stores.
Consumers continued to spend more at restaurants and bars, with sales rising 0.3%, and at grocery stores and online.
While All Inflation Feels Bad, Housing Inflation Is the Worst
For some, unaffordable homes undercut the American dream even more than high gasoline and food prices
By Greg Ip Nov. 15, 2023 5:30 am ET
Japan’s Economy Shrinks for First Time in Three Quarters
The economy contracted 0.5% in the three months to September from the previous quarter
Updated Nov. 14, 2023 9:51 pm ET
TOKYO—Japan’s economy shrank for the first time in three quarters in the July-September period because of sluggish household and corporate spending, contrasting with the U.S. and China, which showed solid growth during the quarter.
The Japanese economy contracted 0.5% in the three months to September from the previous quarter after 1.1% growth in the April-June quarter. The economy shrank 2.1% on an annualized basis, which reflects what would happen if the third-quarter pace continued for a full year.
Market expectations for the
to raise interest rates would likely diminish after Wednesday’s weak results, said Crédit Agricole economist Takuji Aida.
“It is difficult to think based on common sense that the BOJ will move to tighten monetary policy, which could make the Japanese economy fall back into deflation,” Aida said. He expects the BOJ to keep its easy policy unchanged until April 2025.
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