On October 13th, the website of the South China Morning Post in Hong Kong published an article by global market strategist Kerry Craig at Morgan Asset Management, titled "Why the Hope of a Soft Landing in the US Economy Is Easy to Fall into a Recession". The content is compiled as follows:
In the electronic game "Mario Racing", players need to avoid obstacles such as banana peels that may cause them to slide off the track and crash while driving. As the US economy continues to accelerate, investors want to know whether the slippery banana peel may cause the economy to lose control, and what forms these banana peel like obstacles may take.
Given the continued resilience of data in the third quarter of this year, the view that the US economy will have a soft landing is increasingly becoming a consensus. In fact, the Atlanta Federal Reserve Bank's GDPNow model estimates that the US economy will grow by 5.1% in the third quarter of this year. If this is indeed the case, it would be an extraordinary result. Even if the actual situation does not reach the estimated level, the US economic growth in the three months to September may have exceeded many economists and market observers' previous predictions.
Nevertheless, this may be a "high water level" for the US economy, as economic growth may slow down in the coming quarters and the risk of recession should not be ruled out.
In history, there have been few instances where the Federal Reserve has managed to pull inflation back from high levels without dragging the economy into recession. Therefore, if history can be used for reference, the chances of winning this time are not high.
There are many banana peels that may cause the US economy to "slip". In this way, a soft landing is just a stepping stone in the process of recession.
During the COVID-19 epidemic, the US government spent huge amounts of money to plug the gap left by the actual "stalling" of the economy, and continued to spend money when the economy restarted. In order to maintain household expenses and stimulate demand, the US government has postponed the repayment of student loans, provided child care subsidies, and some states even allow people to postpone taxes. As the US government begins to address the issues of deficit growth and debt accumulation, all these fiscal generosity will come to an end.
Household discretionary spending may be restricted as a result, and some household spending habits are worth paying attention to.
Consumers who use credit cards for credit may face approaching credit risks. According to the Federal Reserve Bank of New York, the US credit card debt has risen to a record $1.03 trillion, an increase of $145 billion from a year ago.
Credit card defaults are starting to increase. In the second quarter of this year, the proportion of outstanding payments defined as new defaults (30 days overdue) has increased from 6.5% in the first quarter to 7.2%, higher than the pre pandemic level. Interest rates are likely to remain high and employment prospects remain weak, exacerbating the pressure faced by American households. In the US economy, consumption accounts for about two-thirds.
Given the rise in global oil prices, additional taxes imposed on consumers may take the form of increased energy costs.
In the past few years, the United States has achieved a high degree of energy independence. However, in order to counter the rise in oil prices caused by Russia's deployment to Ukraine, the United States has also consumed a large amount of strategic oil reserves. The impact of further increases in energy prices will be difficult to offset, and consumers are likely to bear the impact of price increases.
In addition, the pressure faced by regional banks due to rising yields and the commercial real estate prospects that have already been under pressure due to the rise of remote work also pose risks. Both of these risks have not been completely eliminated.
Among them, in terms of economic impact, the real estate risk is relatively small, and the financial system has established some processes to limit its impact on the broader financial system. Nevertheless, there is no guarantee that they will not erupt again at the most inopportune time.
Finally, there is politics. The US Congress narrowly avoided a government shutdown in early October. However, the problem has not only not been resolved, but has instead continued into the future, possibly repeating itself in mid November. After that, the political situation in the United States deteriorated more than improved. The long-term government shutdown will have a serious impact on the economy before the end of the year.
In terms of its development trajectory, it may be a widely held view that the US economy will have a soft landing. However, if the risk is realized, it may easily become an unsafe soft landing.