Has the U.S. economy avoided a recession and achieved an economic “soft landing”?
It looks like it, given the latest data pointing to a still-robust economy:
- Annualized GDP for the fourth quarter of 2023, adjusted for inflation, grew 3.3%, driven by strong consumption and government spending.
- Consumer confidence, as measured by The Conference Board, registered its best reading in January since December 2021.
- Nonfarm payrolls grew by a larger-than-expected 353,000 in January, while the unemployment rate held at a below-average 3.7%.
- Finally, the S&P Global purchasing managers’ output index (PMI) showed better-than-expected expansion in both the services and manufacturing sectors.
Inflation, meanwhile, remains down from its near double-digit high in June 2022, albeit still above the U.S. central bank’s 2% target.
While the odds of an imminent recession are fading, investors now must grapple with a new question: What comes next?
A 1990s-Style Rebound?
Many investors seem to expect a “V-shaped” economic rebound that accelerates sharply upward from its low point and fosters strong equity returns over the coming two years. That scenario reflects the events of the mid-1990s, when the Federal Reserve last pulled off a soft landing that helped stabilize inflation, avoid recession and set the stage for a strong expansion.
However, Morgan Stanley’s Global Investment Committee believes this forecast may be too ambitious, offering an ill-fitting analogy for two different eras. The economy of the mid-1990s, with stronger household balance sheets and somewhat higher unemployment, featured ample potential for pent-up demand and “slack” in the labor market (i.e., the shortfall between workers’ desired amount of paid work and the amount of paid work available). These conditions helped set the stage for resurgent growth back then. By contrast, today’s relatively weaker household balances and tighter labor market may not offer as much runway for growth.
Or a Return to “Normal”?
Instead, we believe the 2024 soft landing is more likely to feature decent but unexciting growth, with company profits and interest rates hovering near current levels—what we call “sideways normalization.” Here’s why: