Hard road for a soft landing? Recession risks have come down but still loom in 2024

Forecasters have become so confident of a soft landing for the U.S. economy they’re already unbuckling their seatbelts.

But reports the past week or two, combined with other red flags, are revealing signs of turbulence. For their safety and comfort, economists – not to mention consumers and financial markets - might at least want to keep their seatbelts loosely fastened.

In plainer English, the Federal Reserve may well notch a rare soft landing, with its sharp interest rate hikes since early 2022 slowing the economy enough to bring down inflation without triggering a recession. But there’s still a real risk of a downturn, and the final approach may be bumpy.

“You are beginning to see signs of stress,” says Troy Ludtka, senior U.S. economist at SMBC Nikko Securities. “Our call is that there will be a recession.”

JPMorgan Chase CEO Jamie Dimon told Fox Business Network last week, “I’m a little skeptical in this kind of Goldilocks kind of scenario," referring to moderate growth and low inflation. "It might be a mild recession or heavy recession.”

Why is a soft landing possible?

There’s been ample cause for optimism over the past couple of months. Inflation has eased substantially, notwithstanding an uptick in December. Despite the historic spike in interest rates, consumer spending, which makes up 70% of economic activity, and job growth have continued to grow solidly.

And the Fed said it’s likely done hiking rates and forecast three rate cuts this year, an estimate that topped expectations and propelled the stock market to a record high.

Will the economy get better in 2024?

Forecasters expect the economy to grow 1.6% this year and reckon there’s a 42% chance of a recession, according to a survey early this month by Wolters Kluwer Blue Chip Economic Indicators. In December, they forecast 1.2% growth and gave 47% odds of a slump.

But a 42% recession risk is still historically high. And while the Fed is eyeing rate cuts this year, the delayed effects of its 5.25 percentage points in hikes are expected to take a toll on growth.

Here are some recent signs that the U.S. could still slip into what would likely be a mild downturn this year.

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Small business hiring plans decline

In December, a measure of small business hiring plans fell to the lowest level since June and marked the second lowest reading since the COVID recession in 2020, the National Federation of Independent Business said last week.

“Small business owners remain very pessimistic about economic prospects this year,” said NFIB Chief Economist Bill Dunkelberg.

Manufacturers and service firms cut payrolls

Both manufacturers and service companies said they cut jobs in December, the first time that’s happened since October 2022, according to Ludtka and surveys by the Institute for Supply Management. In 80% of instances where both manufacturers and service companies reduced payrolls, private-sector employment overall was falling, and in 62%, the economy was in recession, Ludtka says.

Also, the employment measure of the ISM services survey reached the lowest level since July 2020.

Strong jobs report masks signs of weakness

The monthly employment report showed employers added a sturdy 216,000 jobs in December and an average of 225,000 a month in 2023. But more than half of last month's gains were in the public sector, health care and social assistance rather than industries that respond to the ups and downs of the economy, such as manufacturing and retail.

Also, job growth was revised down in 11 of 12 months last year, Ludtka says. That often occurs when the economy is at an inflection point, or shifting from growth to contraction.

Credit card delinquencies soar

In the third quarter, credit card debt hit a record high of $1.1 trillion and delinquencies were at their highest level since 2011, according to the Federal Reserve Bank of New York and Ludtka.

That’s squeezing low- and middle-income Americans at the same time that student loan payments frozen during the pandemic have resumed. The financial pressures could hobble consumer spending and weaken the economy, he says.

Corporate America feeling strains

Net profit margins for S&P 500 companies likely shrank to 10.9% in the fourth quarter, the lowest level since late 2020, FactSet, a financial data and software company, estimated Friday ahead of earnings season. As their margins are squeezed, large public companies are likely to step up layoffs to maintain profits, says Kathy Bostjancic, chief economist of Nationwide.

Also, many companies issued 5-year bonds when interest rates were at rock bottom in 2020 and 2021, Ludtka says. With much of that debt set to be refinanced at much higher rates next year, many companies will likely cut workers to preserve profits, Ludtka says

GDP or GDI?

The nation’s gross domestic product (GDP) grew a brisk 2.9% from fall 2022 through fall 2023, according to SMBC and the Commerce Department. But another measure of economic output called gross domestic income (GDI) dipped 0.2% during that period.

While GDP tallies all spending, GDI counts income in the form of wages, corporate profits, rent and other payments. Some economists believe GDI is more accurate since it’s based partly on hard data such as unemployment insurance claims rather than just surveys.

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The yield curve is still inverted

One of the most reliable indicators of a coming recession is an inverted yield curve. Normally, interest rates are higher for longer-term bonds than shorter-term ones because investors need to be rewarded for risking their money for a longer period.

But the yield on the 3-year Treasury bond has been well above the 10-year Treasury for more than a year, notes Gus Faucher, chief economist of PNC Financial Services Group.

That’s been a consistent signal of recession because investors move money into safer longer-term assets – pushing their prices up and their yields down – when the economic outlook grows dimmer.