I have a new piece at The Hill, discussing the prospects for a soft landing:
A useful definition of a soft landing would be a period of at least three years of economic growth with low inflation even after the labor market has full recovered from recession. Surprisingly, there is no evidence that the United States has ever achieved a soft landing, at least as far back as we have economic data. . . .
Oddly, this is not the case in other countries, where soft landings are not particularly unusual. Japan has had extended periods of very low unemployment and low inflation. A notable example of a soft landing occurred in Britain during 2001-08, when unemployment stayed in the 4.7 percent to 5.5 percent range for seven years and inflation remained relatively low. Australia had no official recessions between 1991 and 2020.
Note that the US has never even achieved a soft landing when conditions were favorable, such as a period when inflation and NGDP growth were relatively moderate and hence a tight money policy was not needed. Today, we have very high inflation and NGDP growth, which makes it much more difficult to achieve a soft landing. It’s like trying to land a 747 on an aircraft carrier in the midst of a typhoon.
If three years from today the US has roughly 3.5% unemployment and roughly 2% inflation, then we could say that the Fed achieved a soft landing. Unfortunately, that doesn’t seem very likely.
PS. Without Covid, I think we might have achieved a soft landing in the early 2020s. But we’ll never know.
READER COMMENTS
Garrett
Aug 28 2022 at 10:10pm
Besides 2020, what is the closest the US ever got to a soft landing using your definition?
Garrett
Aug 28 2022 at 10:11pm
I should’ve finished reading your article before commenting since you answer that in the next sentence I read.
David S
Aug 29 2022 at 7:39am
Grammar check—should be “fully recovered.” I guess the Hill can’t afford editors given the ravaged landscape of modern media.
Good article though. I’m truly hoping the U.S. can do it better this time, maybe at the least achieve a “medium landing” where unemployment spikes at 4-5% for a few quarters as NGDP growth rate is softening. More likely is a recession similar to 1990 or 2001 where unemployment spiked higher.
Data is weird right now. Prices for goods are falling in many categories, there’s some correction in tech industries, and low wage workers are making more money.
Scott Sumner
Aug 29 2022 at 1:54pm
Even worse, it was edited. 🙁
Matthias
Aug 29 2022 at 7:26pm
The US (almost?) never has any mini-recessions either.
Scott Sumner
Aug 29 2022 at 8:35pm
Yes, I mentioned that fact in my Hill article.
derek
Aug 29 2022 at 9:42am
I’m not sure I want modern Japan as an economic role model, and I’m not necessarily impressed by the UK’s 2001-2008 performance given that 2009 happened; it may just be that the UK did not benefit as much from the late 1990s growth leading up to a recession in many other countries, or that the UK was creating a larger pitfall for itself in 2009.
But I agree that Australia’s lack of recession for two decades is very impressive.
Scott Sumner
Aug 29 2022 at 1:55pm
There are many other examples of soft landings.
MarkLouis
Aug 30 2022 at 4:38pm
Off topic a bit, but Japan gets unfairly maligned. Last time I looked, real GDP per working age person has been higher in Japan than Europe for a while and was pretty comparable to the US. Having a slow-growing and aging population will distort headline “growth” numbers.
Todd Ramsey
Aug 29 2022 at 11:26am
By your definition, Q3 1996 to Q4 1999.
By Q3 1996 unemployment rate had returned to the pre-recession low of 5.3%, which was itself a 16 year low. PCE inflation below 2.4% and positive Real GDP growth for those three years.
Anecdotally, I remember during that period that when the government reported bad economic news, the stock market usually rose. Possibly because the market believed the bad news made Greenspan less likely to step on the brake.
As a practical matter, all of 1993 – 2000 was remarkable low-inflation growth. Also a period of declining Real Federal Government Expenditures. Coincidence?
Scott Sumner
Aug 29 2022 at 1:57pm
A soft landing occurs when growth continues for several years after unemployment fully recovers, which was not until 1999. The natural rate was lower in the late 1990s than in the late 1980s.
Todd Ramsey
Aug 30 2022 at 11:13am
You are worthy of being held to a higher standard than most internet pundits. Therefore I am disappointed; supporting your point by saying the natural rate changed smacks of moving the goalposts.
In 1996, nobody was complaining about high unemployment. Clinton won in a landslide, aided by a strong economy, which was booming through the 1990s.
If the natural rate can be so precisely determined in real time, what is the natural rate today?
Scott Sumner
Aug 30 2022 at 2:42pm
The problem with Hill articles is that they must be short and simplified for the audience. In various blog posts I’ve explained this in more depth. What I have in mind is that in the US the unemployment rate tends to fall continually until we reach the next recession. In other countries, the unemployment rate falls until something like an equilibrium rate is reached, and then it levels off for many years. We don’t see that in the US.
But fair point, my Hill article would seem to allow for a soft landing in the late 1990s.
In my view, we are already near the cyclical low, so I’d start the clock from early 2022.
Todd Ramsey
Aug 30 2022 at 5:56pm
Thanks for your thoughtful response! Helps me understand!
Andrew_FL
Aug 29 2022 at 3:39pm
If you correct for the effects of price controls, inflation slowed dramatically from 1945-47 (1946-47 if you don’t correct for price controls) and apart from a small <2 point increase in the measured unemployment rate between August & September of 1945 (1.51% to 3.40%) that can be entirely attributed to demobilization, unemployment remain nice and flat hovering around 4%, and in fact dropped between 1946 and 1947.
The fact that NBER thinks this was a recession, and the fact that price indices are distorted by price controls, obscures this instance.
Scott Sumner
Aug 29 2022 at 7:55pm
Good point. I was relying on this unemployment series, which only goes back to 1948:
https://fred.stlouisfed.org/series/UNRATE
Andrew_FL
Aug 29 2022 at 8:11pm
There’s archive data from NBER available for 1940-1946 as well. No seasonally adjusted data are available for 1947. the 1940-46 data is from the period when responsibility for the Current Population Survey was with the Census rather than the Bureau of Labor Statistics. The only difference is that it includes 14 and 15 year olds, so its maybe very slightly higher
https://fred.stlouisfed.org/graph/?g=TdKI
Lizard Man
Aug 31 2022 at 8:13am
How much are supply side factors, such as disruption to grain and oil supplies, or avian flu, contributing to inflation? With the US still adding jobs, it seems to me unlikely that real GDP per capita would be falling absent supply shocks. And if it is the supply shocks fade, and employment is still growing, it would seem that the Fed has room to bring down inflation without causing a recession.
Comments are closed.