At a news conference following the Federal Reserve’s September meeting, Chairman Jerome Powell was asked if he would state that a “soft landing” was his base case for the American economy. “No. He frankly informed reporters, “I would not do it. According to the economists on the staff of the Fed, but not Powell, the most likely scenario for the U.S. economy is a “soft landing,” in which inflation is controlled without the need for a recession that would destroy jobs.
The Fed chair even singled out a number of economic shocks that could have a major negative impact in the months to come. “There is a long list,” he said.
Here are five shocks that economic experts told Fortune are casting doubt on the soft landing, ranging from risks that have been long anticipated, like the start of student loan payments and higher interest rates, to more recent threats, like the UAW strike, a potential government shutdown, and the recent rise in oil prices.
Jesse Wheeler, chief economist of the decision intelligence company MorningConsult, pronounced a foreboding statement: “There are storm clouds out there that we’re all seeing and watching—fearfully.”
In the midst of Washington’s political impasse, the federal government reached its $31.4 trillion debt cap in January. To avoid the United States defaulting on its debts, lawmakers eventually came to a bipartisan agreement despite disagreements over the budget deficit and spending levels.
However, some of the more conservative House Republicans now contend that the agreed-upon cut in discretionary spending should be increased. They point out that the U.S. national debt reached a record high of $33.1 trillion in September and that, as a result of rising spending, the total national deficit between 2024 and 2033 is now expected to exceed $20.2 trillion.
Now that we are in another budget impasse, the government will shut down on October 1 if Republicans and Democrats cannot come to an agreement.
Senior economist Mike Pugliese stated that he saw the probability of a shutdown “as more or less a coin flip.” He also cautioned that the effects could be severe because of the U.S. economy’s struggles with rising interest rates, high oil prices, and union strikes.
The seasoned economist recently warned clients that while there is never a good time for a government shutdown, the possibility of one in the current economic climate is especially worrisome. “A shutdown would not only create a data vacuum at a time when the economy’s future is highly uncertain, it would also modestly slow down economic growth.”
Fed Chair Powell has increased interest rates while pledging to be “data dependent” when formulating monetary policy. Powell has been fighting inflation for more than a year. But if there is a government shutdown, important economic statistics that he needs to perform his duties, such as personal income, consumer spending, and GDP reports from the Department of Commerce and inflation and unemployment figures from the Department of Labour, may not be released on time. The Social Security cost-of-living adjustment for 2024, which is typically announced in mid-October, might also be postponed.
Employees involved in gathering and processing these reports and changes are deemed “non-essential,” according to Pugliese, therefore they won’t get paid during a shutdown.
Additionally, the surge in oil prices, according to commodities specialists at a number of financial institutions, including Goldman Sachs and Wells Fargo, is just the start of a commodity “supercycle” that could keep inflation high.
The good news, according to Erik Knutzen, multi-asset chief investment officer at Neuberger Berman, a private investment management company that oversees over $440 billion in assets, is that “a supercycle is always going to have its ups and downs.”
“There could be short-term pressure on commodities prices once people become concerned about a recession again—and I think they’re starting to be,” he said.
However, over the long term, consumers may need to adjust to paying more for oil and petrol because, in recent years, there has been less motivation to invest in new crude production, which has led to imbalances in supply and demand.
“Oil and gas investment has been somewhat less. Even as we make the shift to a net zero carbon economy, we will still require energy, according to Knutzen. In light of the production cuts that Saudi Arabia, Russia, and OPEC+ have been able to execute, supply and demand difficulties are now becoming apparent.
The United Auto Workers union has been striking specifically at Ford, GM, and Stellantis since September 15 in an unprecedented move. According to a study by Anderson Group, it has cost the American economy more than $1.6 billion in just one week. Additionally, even though the strike presently affects fewer than 15,000 union members, it is steadily spreading, which makes it a significant threat to the Fed’s effort to control inflation. On Friday, an additional 7,000 union workers quit their jobs at a Ford plant in Chicago and a General Motors assembly plant close to Lansing, Michigan.
The UAW is requesting significant pay hikes for its workers. That might persuade other employees to follow suit around the country,
raising interest rates and pressing the Fed to increase inflation.
According to Brad McMillan, chief investment officer for Commonwealth Financial Network, “this strike will be a key test of just how much power labour has,” adding that rising wages as a result of union efforts may “both slow the economy and drive inflation back up.”
More regional effects can be seen here. For the length of the action, there will probably be less consumer spending in the communities where the striking workers live because they are only receiving a portion of their income from the union. The Michigan economy would suffer, but it might be offset if employees are able to obtain the better salaries they desire (as was the case following the most recent UAW strike, in 2019).
According to Zack Pohl, the director of staff for Michigan Governor Gretchen Whitmer, “the greatest threat to the American economy, future job growth, and our state’s fiscal health” if a settlement is not reached immediately is the potential for a protracted strike combined with a federal shutdown. As they say, “time is of the essence.”
The impact on automakers, employees, suppliers, dealers, and customers will increase the longer the strike lasts. Aichi Amemiya, a senior U.S. economist at the Japanese investment firm Nomura, wrote in a note dated September 22 that there is already “anecdotal evidence” that prices for new and used cars are rising “in anticipation of a sharp drop in inventories due to the strike.”
However, at least nationally, the Big Three aren’t as dominant as they once were. According to Mark Zandi, chief economist at Moody’s Analytics, if the strike lasts six weeks, it could slow fourth-quarter gross domestic product growth, but only by about 0.2%.
The impact of the UAW strike on the economy is still “uncertain,” Chair Powell said at the FOMC press conference in September.
“We’ve studied the past; it may have an impact on employment, inflation, and economic growth. But how broad it is and how long it lasts will truly determine it, he said.
For months, economists and others have predicted that the impending restoration of federal student loan payments will upset the economy. After a three and a half year break, over 44 million borrowers will resume paying their loan servicers an average of $393 per month. That will inevitably result in less money being spent elsewhere, at least for certain households.
Estimates of the possible impact on the economy have varied. According to a July research by Oxford Economics, monthly consumer spending declines in the United States might amount to $9 billion, which would reduce GDP growth by 0.1% in 2023 and 0.3% in 2024. Investment bank Jefferies estimates the monthly income impact at $18 billion.
According to Jefferies, who downgraded both Nike and Foot Locker, consumers probably haven’t set aside money for the return of the regular bills, which has ramifications for retail spending. Return of payments is referred to by the company as a “key pain point” for consumer stocks through the year’s conclusion.
According to Corey Tarlowe, an analyst at Jefferies, “We believe US consumers are likely to curtail spending going forward, with apparel & footwear being the most likely areas of pullback.” “We believe the resumed student loan repayments could be a catalyst that weighs even more heavily on already sluggish sales at some of our specialty apparel coverage.”
Consumer spending won’t be the only thing affected. Additionally, borrowers claim they won’t be able to save as much money for retirement. According to Morning Consult, more than 70% of households making at least $100,000 said they anticipate missing at least one payment when they resume.
Once payments resume, some economists are more upbeat about the economic prospects. Low-income households would experience the greatest strain, according to Oxford Economics, while mid- and high-income households should be able to handle their monthly payments with relative ease.
According to Dean Baker, founder and senior economist at the Centre for Economic and Policy Research, there may not even be any noticeable economic effects due to two federal government programmes. According to Baker, the 12-month grace period and the new, more generous income-driven repayment scheme under the Biden administration will help mitigate many of the detrimental economic effects of the return of payments.
If someone doesn’t start paying right away, there won’t be much of a consequence, claims Baker. I don’t believe it will have disastrous effects.
The Fed has been increasing interest rates to slow down the economy and combat inflation. With the 30-year rate approaching 7.5%, a far cry from the sub-3% days of the early eighties, home purchasers are facing the highest interest rates in more than 20 years. This poses numerous issues for investors, businesses, and consumers alike.
After years of skyrocketing prices, higher rates make it even more unaffordable to buy a home. According to Black Knight, a real estate analytics company, the average principal and interest payment for borrowers reached $2,306 in July, the highest amount ever. The increase from two years ago is 60%. According to Black Knight, nearly 25% of July homebuyers had monthly payments of at least $3,000, up from just 5% in June.
Although the economy has started the year on a relatively strong note, any rate increases from the Fed might make things more difficult, including slowing down home sales. According to Jeff Rose, certified financial advisor and owner of GoodFinancialCents.com, this has an impact on the entire economy. Rose points out that a recession in the 1980s was exacerbated by high mortgage rates.
According to Rose, the high rates “can cause a decline in consumer spending and can negatively impact the housing market.” “When people are paying more on their mortgages, they have less money to spend elsewhere, which can slow down economic growth.”
Businesses also cut down on spending and investments when interest rates are rising, not just consumers.
The vice chair and former CEO of Douglas Elliman Real Estate, Dottie Herman, claims that the rates only appear high because of the unprecedented lows they experienced during the pandemic. Higher mortgage rates are more of a slow brake on the financial system as opposed to a shockwave.
“I don’t think it’s a shock to the economy, but rather a swift ‘correction’ following a once-in-a-lifetime event,” adds Herman.
The senior loan officer of Michigan-based Cornerstone Financial Services, Darren Tooley, concurs and adds that while some consumers have been temporarily priced out of the market by higher rates, other economic indicators, such as the unemployment rate, continue to be favourable.
Mortgage interest rates have not had the impact on the economy that most people would have anticipated, according to Tooley, despite reaching their highest levels in more than 20 years.
Interest rates remained steady in September, a sign that the Fed is confident in the health of the economy. They are anticipated to be raised yet again this year.