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Why Firms Are Struggling with the U.S. Economy’s Soft Landing - Coggle…
Why Firms Are Struggling with the U.S. Economy’s Soft Landing
But aren’t parts of the economy already in recession?
In the goods-producing sector, weak performance is attributed to recessionary conditions, despite real goods consumption remaining above pre-Covid levels.
The pandemic's impact on demand has led to unusual patterns, with some industries maintaining high demand (e.g., toys) and others experiencing no growth despite elevated demand (e.g., clothing).
These nuances pose challenges for managers but don't necessarily indicate a macroeconomic failure. In the services economy, a gradual return to pre-Covid trends is observed, with sectors like hotels showing continued growth. Executives in this realm must assess the sustainability of strong tailwinds and the potential for full normalization.
The mythical soft landing no longer looks like a myth.
In mid-2022, the U.S. economy faced overheating, with inflation reaching unprecedented levels. Policymakers responded by aggressively increasing interest rates, heightening the risk of a policy-induced recession.
To avert this, the labor market, under significant pressure, needed to ease without causing a spike in the unemployment rate, which was deemed nearly impossible by many.
However, seven months later, this scenario unfolded, marking the initial stage of a soft landing. The pressing question now is whether this trend will continue.
Anticipated drivers include decreased layoffs and improved labor participation rates on the demand side, while on the supply side, the return of immigration, coupled with robust wage growth, may contribute to further improvements as savings diminish.
What should executives do?
Firms are facing challenges stemming from a robust macroeconomy, requiring a nuanced approach distinct from traditional recession strategies.
Executives should address these challenges by asking critical questions, recognizing that a soft landing, while preferable to a recession, may pose headwinds to profits and margins.
It is crucial for executives to intensify efforts to protect and enhance both, while remaining vigilant to the persistent risk of a recession.
Why navigating a soft landing will prove difficult for firms
The pandemic delivered firms a moment of unusual pricing power, which is now ending.
The pandemic allowed firms to raise prices without losing market share, leading to inflation, high margins, and strong profits.
The labor market remains tight. A soft landing may result in a prolonged tight labor market, making hiring costly. Short-term projections suggest wage growth may not decrease as much as inflation, impacting profit margins.
Capital remains expensive with high interest rates.Capital costs are likely to stay high due to elevated interest rates, driven by intentional efforts by central banks to slow down the economy.
For a complete soft landing, interest rates must reset
The prospect of a sustained soft landing in 2023 is challenging due to the lingering effects of high-interest rates aimed at curbing inflation, which could hinder economic activity.
Despite the shift from inflation to rapid disinflation, the quality of this change is not robust enough, with falling prices observed in certain sectors but high inflation persisting in the service industry.
For a more convincing disinflation, moderation in wage growth within the service economy is crucial. Achieving the necessary conditions for a significant drop in interest rates towards neutral levels, where they neither restrain nor accelerate economic activity, is unlikely in the current year.