A few months ago, the only question about a looming recession was how bad it would be. But with the economy and labour markets showing surprising resilience, talk of a soft landing is making a comeback.
Economy
Recession or soft landing? Economists divided as economy, labour market prove resilient
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The latest hints of optimism come as recent data on jobs and growth have come in stronger than expected. In December, 104,000 new jobs were created in Canada, while preliminary figures showed the economy grew by 0.1 per cent in November, following an identical gain in October. The picture south of the border has been similar, with jobless claims unexpectedly falling in January.
“It’s definitely possible,” said Doug Porter, chief economist at BMO Capital Markets, noting the strength in U.S. economic data.
“And of course, CPI just the other day showed that underlying inflation does seem to be moderating without a recession,” Porter added. “That’s definitely good news. My odds that I’m putting on a soft landing have been slowly rising over the last three months, and the fact that energy prices have backed off, not just here, but in Europe, as well, that’s playing a big role.”

Six months ago, Porter had put the odds of a soft landing at around 20 to 25 per cent, with a 50 per cent chance of a mild recession and a 20 to 30 per cent chance of a hard landing. While the bank’s base case is still for a mild recession, the prospect of a sustained downturn is starting to dissipate, in Porter’s eyes.
“Well, now I think it’s flipped,” he said. “It’s more like there’s about a 30 per cent chance of a soft landing and about a 15 per cent chance of a very hard landing with the sort of middle mild recession in between being about 50 to 55 per cent.”
The BMO economist isn’t alone in taking a more optimistic tone. South of the border, Goldman Sachs Group Inc. chief economist Jan Hatzius cited factors such as China’s economic reopening, falling inflation and a milder European winter, which is taking some of the strain off that region’s energy crisis, as potentially opening a path to a soft landing. The growing chorus of voices betting that a worst-case scenario has been averted also includes German Economy Minister Robert Habeck, who said a complete European economic meltdown had been averted, and Apollo Global Management chief economist Torsten Slok, who said the U.S. economic picture looks more like a soft landing.

The heads of Canada’s biggest banks also talked down the risk of a severe recession during the RBC Capital Markets 2023 Canadian Bank CEO Conference on Jan. 9. Toronto-Dominion Bank chief executive Bharat Masrani said while he couldn’t say with 100 per cent certainty that no recession would come to pass, he pointed to the jobs market, which continues to be remarkably strong.
“Are we seeing a depression here with some of the questions you’re asking me, saying, ‘Oh, my God, the world is coming to an end?’” Masrani said to the moderator of the event. “We don’t see that.”
To other economists, however, recent optimistic data may be a red herring distracting from the hard reality that the economy cannot emerge unscathed from the most aggressive policy tightening cycle in decades.
David Rosenberg, founder of Rosenberg Research & Associates, Inc., pushed back on the soft landing narrative during a Breakfast with Dave live event in Toronto on Jan. 19.
Rosenberg said he’s noticed the definition of soft landing start to creep out to include mild recessions.
“A soft landing is slower growth, which we’ve already had,” Rosenberg said, adding that he now expects a recession is either here already, or coming up quickly.
Our view is that you’ll see a relatively severe recession in Canada
David Doyle, head of economics, Macquarie Group
Rosenberg pointed to Canada’s overheated housing market and its sensitivity to interest rates in particular, noting that the vulnerabilities in the sector are now worse than before the country was plunged into a recession in the early 1990s.
“I have my concerns because there’s a lag of this (tightening cycle effect),” Rosenberg said. “That has me really concerned and nobody talks about it that the Canadian housing bubble, the price bubble, and the debt bubble was bigger than what John Crowe was dealing with in the late 1980s.”
“Our view is that you’ll see a relatively severe recession in Canada,” Doyle said in January, adding that Macquarie Group is expecting a U.S. contraction of 1.5 per cent of real gross domestic product in 2023.
“In Canada, we think it’ll be about twice that, so about a three per cent contraction and that’s because we’ll feel the effects of that U.S. recession, but we think it’ll be amplified in Canada, of course, because of our economy’s dependence on housing and the relationship the labour market here has with the housing market,” Doyle said.
“The question is how much stock can we put in the labour force survey, seemingly as the only real bright spot in the Canadian economy now?” Bartlett said. “It’s not that the economy’s tanking elsewhere, it’s just that it’s very, very weak.”
“This is going to continue to weigh on economic activity in Canada and points to further weakness as we go into 2023, and we continue to expect that we’re going to tip into a recession in the first half of this year,” said Bartlett.
Economy
US inflation and consumer spending cooled in December – Al Jazeera English
The Federal Reserve’s preferred inflation gauge eased further in December, and consumer spending fell – the latest evidence that the Fed’s series of interest rate rises are slowing the economy.
Friday’s report from the US Department of Commerce showed that prices rose 5 percent last month from a year earlier, down from a 5.5 percent year-over-year increase in November. It was the third straight drop.
Consumer spending fell 0.2 percent from November to December and was revised lower to show a drop of 0.1 percent from October to November. Last year’s holiday sales were sluggish for many retailers, and the overall spending figures for the final two months of 2022 were the weakest in two years.
The pullback in consumer spending will likely be welcomed by Fed officials, who are seeking to cool the economy by making lending increasingly expensive. A slower pace of spending could boost their confidence that inflation is steadily easing. Still, the decline in year-over-year inflation matched the Fed’s outlook and is not likely to alter expectations that it will raise its key rate by a quarter-point next week.
On a monthly basis, inflation ticked up just 0.1 percent from November to December for a second straight month. Energy prices plunged 5.1 percent, and the overall cost of goods also fell.
“Core” prices, which exclude volatile food and energy costs, rose 0.3 percent from November to December and 4.4 percent from a year earlier. The year-over-year figure was down from 4.7 percent in November, though still well above the Fed’s 2 percent target.
Falling prices for oil, gas, copper, lumber, wheat and other commodities, along with the unclogging of supply chains, have helped slow the retail costs of cars, furniture and clothes, among other items.
Price increases, though, have remained persistently high for some goods and services, including eggs, which skyrocketed 60 percent last month compared with a year ago. Egg prices rose 11.1 percent just in December, inflated by an outbreak of avian flu that has led to a culling of herds and higher feed costs.
Car rental prices have also soared nearly 27 percent from a year ago and rose 1.6 percent just in December.
But for many other items, inflation is easing. Coffee prices, though up nearly 14 percent in the past year, rose just 0.2 percent last month. And the cost of clothes and shoes rose just 3 percent in the past year and 0.3 percent last month.
Friday’s figures are separate from the better-known inflation data that comes from the consumer price index. The CPI, which was released earlier this month, has also shown a steady deceleration.
“The latest data offer the first tangible signs that the economy’s main engine is slowing,” said Oren Klachkin, lead US economist at Oxford Economics, referring to consumers, whose spending accounts for about 70 percent of economic activity.


The Fed has been seeking to slow spending, growth and the surging prices that have bedevilled the nation for nearly two years. Its key rate, which affects many consumer and business loans, is now in a range of 4.25 percent to 4.5 percent, up from near zero last March. Though inflation has been decelerating, most economists said they think the Fed’s harsh medicine will tip the economy into a recession sometime this year.
“We continue to see the US economy experiencing a mild recession this year,” said Lydia Boussour, senior economist at EY Parthenon.
Low levels of unemployment
A recession typically causes widespread layoffs and higher unemployment. But for now, US employers are adding workers, and the unemployment rate remains at a half-century low of 3.5 percent.
Should job losses, which are occurring at many finance and tech companies, drive up unemployment, a recession could eventually be declared by a group of economists at the National Bureau of Economic Research, a nonprofit that officially determines when recessions occur. The economists at the NBER typically make such an announcement well after a recession has actually begun.
For now, the number of people seeking unemployment benefits – a proxy for layoffs – declined last week to 186,000, a very low level historically. And Walmart, the nation’s largest employer, said it would raise its minimum wage, from $12 to $14 an hour, to help it keep and attract workers.
The Fed is in an increasingly delicate position. Chairman Jerome Powell has emphasised that the central bank planned to keep boosting its key rate and to keep it elevated, potentially until the end of the year. Yet that policy may become untenable if a sharp recession takes hold.
On Thursday, the government reported that the economy grew at a healthy clip in the final three months of last year but with much of the expansion driven by one-time factors: Companies restocked their depleted inventories as supply chain snarls unravelled, and the nation’s trade deficit shrank.
By contrast, consumer spending in the October-December quarter as a whole weakened from the previous quarter, and business investment dropped off sharply. Overall, the economy expanded at a 2.9 percent annual rate in the October-December quarter, down slightly from a 3.2 percent pace in the previous quarter.
If consumers remain less willing to boost their spending, companies’ profit margins will shrink, and many may cut expenses. That trend could lead eventually to waves of layoffs. Economists at Bank of America have forecast that the economy will grow slightly in the first three months of this year – but then shrink in the following three quarters.
More frugal consumers would threaten to send the economy into a recession. But they can also help reduce inflation. Companies cannot keep raising prices if Americans will not pay the higher prices.
Last week, the Federal Reserve’s beige book, a gathering of anecdotal reports from businesses around the country, said, “Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the part of consumers.”
Economy
Your Weekend Reading: Nobody Knows Where the US Economy Will Land – Bloomberg
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Your Weekend Reading: Nobody Knows Where the US Economy Will Land Bloomberg
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Economy
The US Economy Slows Down
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The Marriner S. Eccles Federal Reserve building in Washington, D.C.
Photo: Ting Shen/Bloomberg News
The Federal Reserve must be pleased with the top-line numbers in Thursday’s fourth-quarter GDP report, which showed the U.S. economy grew by a solid 2.9% while its preferred price index slowed to 3.2%. But drill down, and the economy looks to be losing momentum.
Maybe the best news from the report is that consumer spending continued to increase at a steady 2.1% and contributed about half of the GDP growth. It appears that rising interest rates haven’t yet caused consumers to pull back, though the December retail sales report showed a sharp drop in spending and could augur a slowdown.
The shift in spending toward services that began as lockdowns eased continued. Services contributed 1.16% to the consumption increase, with motor vehicle and parts chipping in 0.20%. End-of-year discounts may have moved forward purchases, and auto analysts are forecasting weak growth this year.
Businesses also restocked inventories as supply chains eased, which accounted for 1.46% of the GDP growth. Net exports also added 0.56%. But neither is likely to be sustained going forward. The other big lift to GDP came from government spending, which increased 3.7% and contributed 0.64%. Most of this was transfer payments and salaries rather than defense or public works.
The biggest cause for concern was the 6.7% fall in fixed private investment. Much of that was housing (-26.7%), owing to the sharp increase in interest rates. What the Fed giveth, it now taketh away. Capital expenditures also fell 3.7%, which signals that businesses are getting nervous and spending less on equipment that can boost worker productivity.
Intellectual property investment is holding up better, but research and development declined last quarter. One culprit may be last year’s expiration of the immediate expensing for R&D. The pullback in business investment amid higher interest rates and economic uncertainty has been evident in the ISM purchasing managers index for some time.
The economy can’t live on consumption alone, and the sharp decline in the savings rate—2.9% in the fourth quarter compared to 7.3% a year earlier—suggests that consumers may be running up credit cards to make ends meet or take the vacation they couldn’t during the pandemic. But as savings decline, so may consumer spending.
Perhaps the best news for the Fed is that real disposable personal income grew 3.3% as the personal consumption expenditure price index eased to 3.2%, down from 4.3% in the third quarter and 7.5% in the first. This suggests that its monetary medicine may be starting to work, and it might not have to raise interest rates as high as some expected a few months ago.
Recent job and unemployment claim reports also indicate that the labor market is holding up well, even as many large companies announce layoffs. Small businesses are still hiring, and China’s abandonment of zero-Covid policies will help global growth.
The biggest risks to the U.S. economy other than higher interest rates this year are probably the tax increases in the Inflation Reduction Act and a regulatory onslaught that are compounding business uncertainty. President Biden has a growing economy, and let’s hope he can keep it.




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