US Economy 'No-Landing Scenario' Emerges... "Recession May Not Occur"

[Asia Economy New York=Special Correspondent Joselgina] This year, a 'third scenario' that is neither a 'soft landing' nor a 'hard landing' is emerging regarding the U.S. economy. It is the so-called 'no-landing' scenario, where the economy can soar without recession or slowdown.

The Wall Street Journal (WSJ) reported on the 12th (local time) that more experts on Wall Street are recently supporting this no-landing scenario. Despite the Federal Reserve's (Fed) aggressive interest rate hikes, recent strong employment and consumer spending far exceeded expectations, raising the prospect that the U.S. economy may avoid recession or stagnation. In this case, inflation may not fall to the target level, and the Fed's tightening is likely to continue. WSJ described it as "a third scenario that seemed impossible just a few weeks ago," adding, "Now some economists are no longer considering either a soft landing or a hard landing."

[Image source=Reuters Yonhap News]

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Neil Dutta, an economist at Renaissance Macro, evaluated that "the no-landing scenario is today's reality." He assessed that Fed officials are "very reluctant to acknowledge the clear fact that the economy is accelerating again," despite presenting forecasts of economic slowdown this year.

Supporters of the no-landing scenario emphasize that, contrary to initial expectations that the Fed's aggressive rate hikes since March last year would curb investment and employment, recent economic indicators point toward economic growth. Earlier, the U.S. Department of Labor revealed that nonfarm payrolls increased by 517,000 in January, nearly three times the market forecast. The unemployment rate was also 3.4%, much lower than the forecasted 3.6%, marking the lowest since May 1969.

Mark Zianoni, Barclays' chief U.S. economist, said that this January employment report shocked experts because it differed from previous statistics that showed the Fed's tightening impacting the labor market. He pointed out, "Monetary policy by the Fed had less impact on labor demand than we expected."

Although the wage growth rate slowed in January, the average weekly working hours increased, resulting in a total weekly wage increase of 8.5% year-over-year and 1.5% month-over-month. In the same month, the average weekly operating hours in the U.S. manufacturing sector rose by 1.2%, showing a rebound. WSJ predicted that based on this increase in household income, companies could further raise product prices and pass the price burden onto customers.

As wage increases and corporate product price hikes intensify upward inflationary pressure, the Fed has no choice but to continue tightening by raising interest rates. Edan Harris, head of global economic research at Bank of America (BoA), noted, "The longer the plane circles at 30,000 feet, the greater the risk of running out of fuel," suggesting that if growth accelerates, it will be difficult to lower inflation.

Goldman Sachs has also lowered the probability of a U.S. recession within the next 12 months from 35% to 25%. Jan Hatzius, Goldman Sachs' chief economist, said, "If the economy accelerates beyond trend growth, a soft landing scenario where inflation falls to around 2% will be difficult." Torsten Slok, chief economist at Apollo Management, mentioned the no-landing scenario in a previous report, stating, "In a situation where the economy does not slow down, upward inflation risks emerge, and high interest rates may continue."

However, WSJ emphasized that the no-landing scenario still has only minority support, with more people expecting a recession. Experts point out that there is inevitably a time lag before the Fed's tightening policy impacts the economy. In 2006, it took about a year and a half for rate hikes to affect the labor market. Kathy Bostanich, chief U.S. economist at Nationwide, predicted a mild recession starting mid-year as corporate profits continue to decline and companies reduce employment.

There are also increasing voices that the Fed may pursue even stronger tightening due to strong economic indicators. Jeremy Siegel, a leading bull on Wall Street and professor at the University of Pennsylvania's Wharton School, said immediately after the January employment report, "This could be bad news for the economy," adding, "The Fed is more likely to keep interest rates high for a long time to suppress inflation." The interest rate futures market reflects over a 90% probability that the Fed will raise rates above 5% by June, up from about 45% a month ago.

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