- The US economy is showing signs of resilience, including from the labor market and consumer spending.
- LinkedIn’s chief economist, however, isn’t convinced that a soft-landing is the most likely outcome.
- Soft-landing outlooks preceded prior US recessions too, and some forecasters may be overly optimistic.
Earlier this year, a growing chorus of forecasters were feeling increasingly certain that the US was going to skirt a recession as data piled up showing that the US economy was doing surprisingly well navigating rocky terrain.
But the consensus has grown murkier on whether the economy will achieve a happy-ending, soft-landing scenario. Chicago Fed economists said in September they don’t expect a downturn, while the likes of Jeremy Grantham and Jamie Dimon have warned of looming risks. BlackRock strategists, for their part, say that economic activity has already flatlined in the weakest 18 month stretch outside of an official recession.
Karin Kimbrough, LinkedIn’s chief economist, is among those that aren’t so sure the US can avoid a downturn, despite some recent data supporting a no-recession outlook.
“If you look at any macro data leading up to prior recessions, it’s always good until it isn’t,” she told Insider in an interview on Monday. “Labor markets are often the last shoe to drop in how the economy turns.”
Indeed, there’s enough data to have convinced many forecasters to keep a soft-landing scenario on the table. The labor market has remained robust, steady economic growth is still there, and consumers have yet to buckle.
And yet, the Fed hiked interest rates 500 basis points in 18 months since March 2022, some businesses have started to go belly up, and inflation has stayed sticky. In August, the consumer price index rose by 3.7% on the year, above July's reading and almost double the Fed's 2% target.
Most strategists don't expect the Fed to cut interest rates until 2024, which could place extended pressure on Americans' wallets. The "higher-for-longer" narrative has already taken hold in the stock market, with investors enduring back-to-back brutal months.
"I think there's still risks gradually accumulating in the economy," Kimbrough said.
Consumer and labor market risks loom
A number of factors pose as headwinds for consumers, in the chief economist's view. The childcare cliff, for one, poses an obstacle if providers end up closing their doors and working families struggle to find or keep care.
Plus, even though inflation has cooled from last year's peak, Americans have still seen a sharp loss of purchasing power and deteriorating real wages.
The resumption of federal student loan payments presents another concern.
"Everything from that childcare cliff to student loan payments coming back online to savings being exhausted and the fact that inflation did eat into real wages for a very long time," Kimbrough said. "Real wages are starting to come back by some measures, but inflation really ate away at people's purchasing power. So I think all that's going to weigh on the consumer."
Kimbrough believes consumers are "going to be increasingly reliant on ensuring that they have a job."
While there are positions available, Bureau of Labor Statistics data does show monthly openings are not as elevated as before, with 1.5 job openings per unemployed person.
"Right now, I think a lot of workers are still getting accustomed to the fact that the terms they could demand a year and a half ago are not the terms they can demand now," Kimbrough said, pointing to remote-work flexibility as one example. "I think those things are gradually turning."
Ultimately, the consumer looks "more vulnerable than they've been in the last couple of years," Kimbrough said.
The pandemic savings so many Americans built up are now dwindling, and credit card debt is up. A press release from the Federal Reserve Bank of New York's Center for Microeconomic Data stated "credit card balances increased by $45 billion, from $986 billion in Q1 2023 to a series high of $1.03 trillion in the Q2 2023."
Gregory Daco, EY's chief economist, also recently warned that there are headwinds impacting consumers, forcing them to perhaps cut back on spending.
"Consumers are becoming more conservative with their spending as they continue to face a trifecta of headwinds including elevated inflation, higher interest rates and slowing labor market and income gains," Daco said. "The restart of student loan payments on Oct. 1, the near depletion of excess savings, and tight credit conditions will further weigh on consumers' ability to spend going into next year."