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Even a soft landing for the economy can be uneven

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One of last year’s defining economic stories was the complex debate over whether the US economy was slipping into a recession or just descending, with some altitude sickness, from a growth spurt after pandemic lows.

This year, those issues and contentions are likely to continue. The Federal Reserve has been sharply raising borrowing costs for consumers and businesses in a bid to rein in spending and slow inflation, with the effects still coursing through the veins of business activity and the household budget. Therefore, most banks and major credit bureaus expect a recession in 2023.

At the same time, a growing crop of economists and big market investors see a firm chance that the economy will either avoid a recession or survive a brief stagnation in growth as consumer spending eases and pandemic-era disruptions ease. help inflation. cautious trend towards more tolerable levels – a hopeful outcome widely called a soft landing.

“The possibility of achieving a soft landing is greater than the market believes,” said Jason Draho, economist and head of asset allocation Americas at UBS Global Wealth Management. “Inflation has now come down faster than some had recently expected, and the job market has held up better than expected.”

What seems more likely is that even if a soft landing is achieved, it will be softer for some households and businesses and harder for others.

In late 2020 and early 2021, talk of a “K-shaped recovery” took root, inspired by the divide of the initial pandemic economy between secure remote workers – whose savings, home prices and portfolios soared – and the millions surfing dangerous or tenuous investments. personal jobs or relying on a large but porous unemployment benefit system.

In 2023, if there is a soft landing, it could also be a K-shape. The downside is likely to be felt mostly by cash-strapped small businesses and workers who are no longer spurred on by savings and the bargaining power of the job they accumulated during the pandemic.

In any case, more turmoil is to come as relatively low unemployment, high inflation and unstable growth continue to coexist uncomfortably.

Generally healthy corporate balance sheets and consumer credit can be bulwarks against volatile price forces, global instability and the withdrawal of federal emergency aid. Chief executives of companies catering to wealthy and financially sound middle-class families remain confident in their prospects. Al Kelly, chief executive of Visa, the credit card company, recently said that “we don’t see anything but stability.”

But the Fed’s projections indicate that 1.6 million people could lose jobs by the end of this year – and that the unemployment rate will increase at a magnitude that in recent history has always been accompanied by a recession.

“There will be some easing in job market conditions,” said Jerome H. Powell, the chairman of the Fed, at his most recent press conference, explaining the rationale for the central bank’s recent persistence in raising rates. “And I wish there was a completely painless way to restore price stability. There is not. And that’s the best we can do.”

Over the past two years, researchers have often observed that, on average, lower-wage workers made the biggest wage gains, with bumps in pay that often outpaced inflation, especially for those who changed jobs. But these gains are relative and have often been increases from low baselines.

According to the Realtime Inequality tracker, created by economists at the University of California, Berkeley, inflation-adjusted disposable income for the poorest 50% of working-age adults grew by 4.2% from January 2019 to September 2022. the richest 50%, income lagged behind inflation. But this comparison leaves out the context that the median income of the poorest 50% in 2022 was $25,500 – roughly $13 per hour pay.

“As we look ahead, I think it’s entirely possible that the families and people we generally care about at the bottom of the income distribution are going to face some kind of combination of job loss and softer wage gains, just like any other savings they had from the pandemic are depleted,” said Karen Dynan, a former chief economist at the Treasury Department and a professor at Harvard University. “And it will be difficult for them.”

Consumer spending accounts for about 70% of economic activity. The widespread resilience of general consumption last year, despite high inflation and sour business sentiment, was largely attributed to the savings that households of all types accumulated during the pandemic: a $2.3 trillion gumbo in aid from the government, reduced spending on personal services, windfall profits from mortgage refinancing, and gains from redeemed stocks.

What remains of these stocks is concentrated in the richest families.

Most major US banks reported that current balances are above pre-pandemic levels across all income groups. However, the cost of living is higher than in 2019 across the country. And depleted savings among the bottom third of earners may continue to decline, while rents and living expenses still rise, albeit more slowly.

Most major economic measures are reported in “real” terms, subtracting inflation from changes in individual income (real wage growth) and total output (real gross domestic product, or GDP). If the government’s calculations of inflation continue to decline as quickly as markets expect, the inflation-adjusted numbers could turn more positive, making the slowing economy healthier.

These shifting dynamics could create a deep tension between resilient-looking official data and consumer sentiment that they may again find themselves short on financial protection.

Another potential factor in a K-shaped landing could be the growing pressure on small companies, which have less leeway than larger companies in managing costs. Small employers are also more likely to be affected by the credit crunch, as lenders become much more demanding and expensive than just a year ago.

In a December survey of 3,252 small business owners by Alignable, a Boston-based small business network with seven million members, 38% said they had only a month or less of cash reserves, up 12 percentage points from the previous year. last year. Many landlords who were lenient with payments at the height of the pandemic have become tougher, asking for back rent in addition to raising current rents.

Unlike many large-scale employers who get cheap long-term financing by selling corporate bonds, small businesses tend to finance their operations and payrolls with a mixture of cash on hand, corporate credit cards and bank loans. commercials. Higher interest rates have made the last two sources of funding much more expensive – which spells trouble for companies that may need a new line of credit in the coming months. And incoming cash flows depend on sales remaining strong, a profound uncertainty for most.

A Bank of America survey of small business owners in November found that “more than half of respondents expect a recession in 2023 and plan to reduce spending accordingly.” For some business owners, decisions to maintain profitability can lead to staff reductions.

Some companies facing labor shortages, rising costs and shrinking customers have already decided to close.

Susan Dayton, co-owner of Hamilton Street Cafe in Albany, NY, closed her business in the fall when she felt rising costs of key ingredients and staff turnover were no longer sustainable.

She said the labor shortage for small shops like hers could not be solved simply by offering higher wages. “What I’ve found is that giving people more money just means you’re paying more for the same people,” Dayton said.

This tension between profitability, people, and customer growth will be especially strong for smaller companies. But it also exists in corporate America. Some industry analysts say corporate profits, which have soared for two years, could weaken but not plummet as input costs stabilize while companies manage to keep prices high even as sales slow.

That could limit most of the layoffs to less valued workers during corporate downsizing and to certain interest rate sensitive sectors such as real estate or technology – creating another potential route to a soft, if uneven, landing.

The biggest challenge to overcome is that one person’s or company’s income is another’s expense. Those who think inflation can be tamed without a labor market meltdown hope that spending will decline just enough to cool price rises, but not so much that employers lay off workers – which could reduce spending even further, starting a vicious circle.

If the tense US economy is to relax rather than collapse, it will need multiple double-edged realities to be resolved favorably.

For example, many retail industry analysts feel that the holiday season may have been the last holiday for the pandemic-era burst of merchandise shopping. Some consumers may be fed up with recent spending, while others become more selective in their purchases, balking at higher prices.

This could drastically reduce the “pricing power” of companies and slow down inflation associated with goods. Service-oriented businesses may also be somewhat affected. But the same phenomenon can lead to layoffs, as demand slowdown reduces staffing needs.

In the coming months, the US economy will be influenced in part by geopolitics in Europe and the coronavirus in China. Volatile changes in what some researchers call “systemically significant prices” such as gas, utilities and food could materialize. People who prepare for a recession by cutting investment or spending may, in turn, create one. And it’s unclear how far the Fed will raise interest rates.

Then again, these risk factors could turn out to be relatively benign.

“It’s 50-50, but I have to take sides, right? So I’m on the non-recession side,” said Mark Zandi, chief economist at Moody’s Analytics. “I can defend either side of this pretty easily, but I think with a little luck and some tough politics, we can move forward.”