Where Is the U.S. Economy Headed: Soft Landing, Hard Landing, or Stagflation?

"The Economic Recovery So Far

The recovery from the 2020 recession was rapid through the first half of 2021, but the transition to moderate, sustainable economic growth has been choppy, with negative growth in the first quarter of 2022. Moreover, high inflation has complicated the path forward. Since March 2022, the annual change in the Consumer Price Index has been above 8%.

To reduce inflation, the Federal Reserve (Fed) is raising the federal funds rate (a short-term interest rate) to reduce aggregate demand (total spending). Since March, the Fed has raised rates from a range of 0- 0.25% to a range of 1.5-1.75%. This raises the question of how much demand needs to slow to restore low inflation. This Insight discusses three scenarios for what might come next—a soft landing, a hard landing, and stagflation.

Soft Landing?

Fed leadership aspires to restore price stability through a “soft landing,” where growth is moderate but positive, and unemployment rises modestly, if at all. This is reflected in Fed leadership’s medianprojection that inflation will fall to 2.6% in 2023, while unemployment will remain below 4%. Fed Governor Christopher Waller envisions a soft landing where firms reduce job openings instead of laying off workers. Skeptics refer to this scenario as the “immaculate disinflation” because, under standard theory, a sizeable and rapid reduction in inflationary pressures requires an increase in unemployment.

Soft landings are infrequent. Fed Chair Jerome Powell recently argued that soft landings occurred after monetary tightening in 1965, 1984, and 1994, as shown in Figure 1, and that some other recessions, such as in 2020, should not be attributed to tightening. However, inflation was low in 1965 and 1994, and below 5% in 1984.."
U.S. Economy 

Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy

"The 2007-2009 recession was long and deep, and according to several indicators was the most
severe economic contraction since the 1930s (but still much less severe than the Great
Depression). The slowdown of economic activity was moderate through the first half of 2008, but
at that point the weakening economy was overtaken by a major financial crisis that would
exacerbate the economic weakness and accelerate the decline.

Evidence suggests that the process of economic recovery began in mid-2009. Real gross domestic
product (GDP) has been on a positive track since then, although the pace has been uneven and
relatively weak. The stock market has recovered from its lows, and employment has increased
moderately. On the other hand, significant economic weakness remains evident, particularly in
the balance sheet of households, the labor market, and the housing sector..."

Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy

"The 2007-2009 recession was long and deep, and according to several indicators was the most
severe economic contraction since the 1930s (but still much less severe than the Great
Depression). The slowdown of economic activity was moderate through the first half of 2008, but
at that point the weakening economy was overtaken by a major financial crisis that would
exacerbate the economic weakness and accelerate the decline..."

Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy
"The 2007-2009 recession was long and deep, and according to several indicators was the most severe economic contraction since the 1930s (but still much less severe than the Great Depression). The slowdown of economic activity was moderate through the first half of 2008, but at that point the weakening economy was overtaken by a major financial crisis that would exacerbate the economic weakness and accelerate the decline..."

Vice President Biden Releases Report on Recovery Act Impact on Innovation
"Vice President Joe Biden today unveiled a new report, “The Recovery Act: Transforming the American Economy through Innovation,” which finds that the Recovery Act’s $100 billion investment in innovation is not only transforming the economy and creating new jobs, but helping accelerate significant advances in science and technology that cut costs for consumers, save lives and help keep America competitive in the 21st century economy. The report can be viewed in full HERE.

“From the beginning, we have been a nation of discovery and innovation – and today we continue in that tradition as Recovery Act investments pave the way for game-changing breakthroughs in transportation, energy and medical research,” said Vice President Biden. “We’re planting the seeds of innovation, but private companies and the nation’s top researchers are helping them grow, launching entire new industries, transforming our economy and creating hundreds of thousands of new jobs in the process.”

According to this new analysis, the U.S. is now on-track to achieve four major innovation breakthroughs thanks to Recovery Act investments:

Cutting the cost of solar power in half by 2015, putting it on par with the cost of retail electricity from the grid.
Cutting the cost of batteries for electric vehicles by 70 percent between 2009 and 2015, putting the lifetime cost of an electric vehicle on-par with that of its non-electric counterpart.
Doubling U.S. renewable energy generation capacity and U.S. renewable manufacturing capacity by 2012, a breakthrough that would not be possible without the Recovery Act.
Bringing the cost of a personal human genome map to under $1,000 in five years, allowing researchers to sequence 50 human genomes for the same cost as sequencing just one today..."

Council of Economic Advisers Releases a New Report on the Recovery Act
"As part of the unprecedented accountability and transparency provisions included in the American Recovery and Reinvestment Act of 2009 (ARRA), the Council of Economic Advisers (CEA) was charged with providing to Congress quarterly reports on the effects of the Recovery Act on overall economic activity, and on employment in particular. Today we released our third report (pdf), with an assessment of the effects of the Act through the first quarter of 2010.

The main macroeconomic findings include:

The magnitude of the fiscal stimulus increased substantially in the first quarter of 2010 (from $83 billion in 2009:Q4 to $112 billion in 2010:Q1) largely because of a surge in tax refunds and lower final tax liabilities due to the Making Work Pay tax credit.
Government investment outlays in areas such as infrastructure and clean energy, which increased $16 billion in 2010:Q1, are expected to rise further throughout 2010.
The CEA estimates that as of the first quarter of 2010, the ARRA has raised employment relative to what it otherwise would have been by between 2.2 and 2.8 million. These estimates are broadly similar to those of other analysts. Our estimates incorporate the most recent information about actual Recovery Act spending and tax reductions, as well as current trends in employment and production..."

SECOND RECIPIENT REPORTING PERIOD: 10/01/09 -- 12/31/09
"The Recovery Act requires recipients of Recovery awards to report on how they have used the money. For the most recent reporting period – October 1 through December 31, 2009 – recipients began filing reports on January 1, 2010"

The 2009 Economic Landscape:How the Recession Is Unfolding across Four U.S. Regions
"...The following series of articles takes a closer look at the distinct way that this recession is playing out in four major regions of the country. The first article describes how the latest downturn is exacerbating long-term problems in the manufacturing sector of the Industrial Midwest. In the second article, we explore how
formerly booming housing markets in Arizona, California, Florida, and Nevada have given way to a housing bust that has sharply reversed the momentum of the regional economy. The third article focuses on the impact of financial market turmoil on New York City and other financial centers along the East Coast, while the fourth article outlines why a number of states in the nation’s midsection have fared better than most thus far because of their high dependence on energy and agricultural
production."

Questions About the $700 Billion Emergency Economic Stabilization Funds:The First Report of the Congressional Oversight Panel for Economic Stabilization, Dec. 10, 2008.
"This is the first report of the Congressional Oversight Panel. We are here to investigate, to analyze and to review the expenditure of taxpayer funds. But most importantly, we are here to ask the questions that we believe all Americans have a right to ask: who got the money, what have they done with it, how has it helped the country, and how has it helped ordinary people?.."

EconomicRecovery.gov
A new resource from the U.S. Department of Commerce designed to help the "American people to find help to keep their homes, find jobs and protect their savings." Provides links to information at the White House, Treasury Department, Commerce Department, Agriculture Department, Labor Department, Department of Housing and Urban Development, Small Business Administration, and the Federal Deposit Insurance Corporation.