Even a Soft Landing for the Economy May Be Uneven

Small businesses and lower-income families could feel pinched in the months ahead whether or not a recession is avoided this year.

By Talmon Joseph Smith

Jan. 6, 2023

One of the defining economic stories of the past year was the complex debate over whether the U.S. economy was going into a recession or merely descending, with some altitude sickness, from a peak in growth after pandemic lows.

This year, those questions and contentions are likely to continue. The Federal Reserve has been steeply increasing borrowing costs for consumers and businesses in a bid to curb spending and slow down inflation, with the effects still making their way through the veins of commercial activity and household budgeting. So most banks and large credit agencies expect a recession in 2023.

At the same time, a budding crop of economists and major market investors see a firm chance that the economy will avoid a recession, or scrape by with a brief stall in growth, as cooled consumer spending and the easing of pandemic-era disruptions help inflation gingerly trend toward more tolerable levels — a hopeful outcome widely called a soft landing.

“The possibility of getting a soft landing is greater than the market believes,” said Jason Draho, an economist and the head of Americas asset allocation for UBS Global Wealth Management. “Inflation has now come down faster than some recently expected, and the labor market has held up better than expected.”

What seems most likely is that even if a soft landing is achieved, it will be smoother for some households and businesses and rockier for others.

In late 2020 and early 2021, talk of a “K-shaped recovery” took root, inspired by the early pandemic economy’s split between secure remote workers — whose savings, house prices and portfolios surged — and the millions more navigating hazardous or tenuous in-person jobs or depending on a large-yet-porous unemployment aid system.

In 2023, if there’s a soft landing, it could be K-shaped, too. The downside is likely to be felt most by cash-starved small businesses and by workers no longer buoyed by the savings and labor bargaining power they built up during the pandemic.

In any case, more turbulence lies ahead as fairly low unemployment, high inflation and shaky growth continue to queasily coexist.

Generally healthy corporate balance sheets and consumer credit could be bulwarks against the forces of volatile prices, global instability and the withdrawal of emergency-era federal aid. Chief executives of companies that cater to financially sound middle-class and affluent households remain confident in their outlook. Al Kelly, the chief executive of Visa, the credit card company, said recently that “we are seeing nothing but stability.”

But the Fed’s projections indicate that 1.6 million people could lose jobs by late this year — and that the unemployment rate will rise at a magnitude that in recent history has always been accompanied by a recession.

“There will be some softening in labor market conditions,” Jerome H. Powell, the Fed chair, said at his most recent news conference, explaining the rationale for the central bank’s recent persistence in raising rates. “And I wish there were a completely painless way to restore price stability. There isn’t. And this is the best we can do.”

Will the bottom 50 percent backslide?

Over the past two years, researchers have frequently noted that, on average, lower-wage workers have reaped the greatest pay gains, with bumps in compensation that often outpaced inflation, especially for those who switched jobs. But those gains are relative and were often upticks from low baselines.

According to the Realtime Inequality tracker, created by economists at the University of California, Berkeley, inflation-adjusted disposable income for the bottom 50 percent of working-age adults grew 4.2 percent from January 2019 to September 2022. Among the top 50 percent, income lagged behind inflation. But that comparison leaves out the context that the average income for the bottom 50 percent in 2022 was $25,500 — roughly a $13 hourly pay rate.

“As we look ahead, I think it is entirely possible that the households and the people we usually worry about at the bottom of the income distribution are going to run into some kind of combination of job loss and softer wage gains, right as whatever savings they had from the pandemic gets depleted,” said Karen Dynan, a former chief economist at the Treasury Department and a professor at Harvard University. “And it’s going to be tough on them.”

Consumer spending accounts for roughly 70 percent of economic activity. The widespread resilience of overall consumption in the past year despite high inflation and sour business sentiment was largely attributed to the savings that households of all kinds accumulated during the pandemic: a $2.3 trillion gumbo of government aid, reduced spending on in-person services, windfalls from mortgage refinancing and cashed-out stock gains.

What’s left of those stockpiles is concentrated among wealthier households.

After spiking during the pandemic, the overall rate of saving among Americans has quickly plunged amid inflation.

The personal saving rate -- a monthly measure of the percentage of after-tax income that households save overall -- has dropped precipitously in recent months. 

Note: The personal saving rate is also referred to as "personal saving as a percentage of disposable personal income." Personal saving is defined as overall income minus spending and taxes paid.

Most major U.S. banks have reported that checking balances are above prepandemic levels across all income groups. Yet the cost of living is higher than it was in 2019 throughout the country. And depleted savings among the bottom third of earners could continue to ebb while rent and everyday prices still rise, albeit more slowly.

Most key economic measures are reported in “real” terms, subtracting inflation from changes in individual income (real wage growth) and total output (real gross domestic product, or G.D.P.). If government calculations of inflation continue to abate as quickly as markets expect, inflation-adjusted numbers could become more positive, making the decelerating economy sound healthier.

That wonky dynamic could form a deep tension between resilient-looking official data and the sentiment of consumers who may again find themselves with little financial cushion.

Does small business risk falling behind?

Another potential factor for a K-shaped landing could be the growing pressure on small businesses, which have less wiggle room than bigger companies in managing costs. Small employers are also more likely to be affected by the tightening of credit as lenders become far pickier and pricier than just a year ago.

In a December survey of 3,252 small-business owners by Alignable, a Boston-based small business network with seven million members, 38 percent said they had only one month or less of cash reserves, up 12 percentage points from a year earlier. Many landlords who were lenient about payments at the height of the pandemic have stiffened, asking for back rent in addition to raising current rents.

Unlike many large-scale employers that have locked in cheap long-term funding by selling corporate bonds, small businesses tend to fund their operations and payrolls with a mix of cash on hand, business credit cards and loans from commercial banks. Higher interest rates have made the latter two funding sources far more expensive — spelling trouble for companies that may need a fresh line of credit in the coming months. And incoming cash flows depend on sales remaining strong, a deep uncertainty for most.

A Bank of America survey of small-business owners in November found that “more than half of respondents expect a recession in 2023 and plan to reduce spending accordingly.” For a number of entrepreneurs, decisions to maintain profitability may lead to reductions in staff.

Some businesses wrestling with labor shortages, increased costs and a tapering off in customers have already decided to close.

Susan Dayton, a co-owner of Hamilton Street Cafe in Albany, N.Y., closed her business in the fall once she felt the rising costs of key ingredients and staff turnover were no longer sustainable.

She said the labor shortage for small shops like hers could not be solved by simply offering more pay. “What I have found is that offering people more money just means you’re paying more for the same people,” Ms. Dayton said.

That tension among profitability, staffing and customer growth will be especially stark for smaller businesses. But it exists in corporate America, too. Some industry analysts say company earnings, which ripped higher for two years, could weaken but not plunge, with input costs leveling off, while businesses manage to keep prices elevated even if sales slow.

That could limit the bulk of layoffs to less-valued workers during corporate downsizing and to certain sectors that are sensitive to interest rates, like real estate or tech — creating another potential route for a soft, if unequal, landing.

The biggest challenge to overcome is that the income of one person or business is the spending of another. Those who feel that inflation can be tamed without a collapse in the labor market hope that spending slows just enough to cool off price increases, but not so much that it leads employers to lay off workers — who could pull back further on spending, setting off a vicious circle.

What are the chances of a soft landing?

If the strained U.S. economy is going to unwind rather than unravel, it will need multiple double-edged realities to be favorably resolved.

For instance, many retail industry analysts think the holiday season may have been the last hurrah for the pandemic-era burst in purchases of goods. Some consumers may be sated from recent spending, while others become more selective in their purchases, balking at higher prices.

That could sharply reduce companies’ “pricing power” and slow inflation associated with goods. Service-oriented businesses may be somewhat affected, too. But the same phenomenon could lead to layoffs, as slowdowns in demand reduce staffing needs.

In the coming months, the U.S. economy will be influenced in part by geopolitics in Europe and the coronavirus in China. Volatile shifts in what some researchers call “systemically significant prices,” like those for gas, utilities and food, could materialize. People preparing for a downturn by cutting back on investments or spending could, in turn, create one. And it is not clear how far the Fed will go in raising interest rates.

Then again, those risk factors could end up relatively benign.

“It’s 50-50, but I have to take a side, right? So I take the side of no recession,” said Mark Zandi, the chief economist at Moody’s Analytics. “I can make the case on either side of this pretty easily, but I think with a little bit of luck and some tough policymaking, we can make our way through.”

Kevin McCarthy hopes for deal as US House Speaker fight hits day four

Kevin McCarthy's attempt to become House speaker has been frustrated by members of his party

By Kathryn Armstrong & Anthony Zurcher in London and Washington

Le Monde

Members of the US House of Representatives will try for a fourth day to elect a Speaker on Friday in an attempt to end a political impasse.

The frontrunner, Republican Kevin McCarthy, has so far failed to reach the 218 votes required for election.

And there is still no clear sign that any deal will win over enough colleagues to get him over that mark.

There have so far been 11 failed votes - a paralysis of government not seen since the pre-Civil War era.

The reason for him falling short is a right-wing cohort within his own party refusing to vote for him.

Mr McCarthy needs to ease the concerns of enough Republican holdouts - 16 out of 20 - to win him the speakership.

This is nearly always a formality in US politics at the start of a Speaker's two-year term following congressional elections.

For more than a day now, there has been talk of concessions Mr McCarthy could make to win them over. As talks proceed, the outlines of a potential deal have become more clear.

His hope at this point seems to be that if he can convince some of them to back him, there will be sufficient pressure on the others to throw in the towel and give up the fight.

Progress is slow and, as some McCarthy supporters grow restless, a resolution - if it comes - could still be days away.

Mr McCarthy had already offered compromises that would have weakened the Speaker's role in the House. However, these haven't been enough to break the impasse.

The Speaker of the House is the second in line to the presidency, after Vice-President Kamala Harris. They set the agenda in the House, and no legislative business can be conducted there without them.

Without a Speaker, some key functions of the House cannot be conducted - including the swearing in of members, forming committees and the passing of bills.

The so-called "Never Kevins" who are standing in Mr McCarthy's way are sceptical of the California congressman's conservative bona fides, despite his endorsement from former President Donald Trump.

Their votes are crucial because Republicans took over the House in November's midterm elections by only a slender margin of 222 to 212 in the 435-seat chamber.

There haven't been many indications that a deal is imminent, however.

One staunch member of the holdout group, Congressman Matt Gaetz, told reporters on Thursday night that he won't support any deal that "results in Kevin McCarthy becoming speaker".

The last ballot that took place on Thursday before the House was adjourned saw Mr McCarthy earn 200 votes, while 12 Republicans voted for Byron Donalds and seven for Kevin Hern. Mr Gaetz cast a protest ballot for Mr Trump to serve in the role.

Not since 1860, when the United States' union was fraying over the issue of slavery, has the lower chamber of Congress voted so many times to pick a Speaker. Back then it took 44 rounds of ballots.

Meanwhile, the minority Democrats continued to vote in unison for their leader, New York's Hakeem Jeffries, the first black person ever to lead a party in Congress. But it still seems unlikely that he could win over six Republican defectors to become Speaker.

Friday's voting will also take place on the second anniversary of the US Capitol riots, when a mob of Donald Trump supporters tried to stop Congress from certifying the Republican's 2020 election defeat.

The Kraken COVID variant is coming — but not yet

XBB.1.5 might drive higher COVID infections in Europe, but not within the next month, says the ECDC.

The good news is that Europe has some time to prepare for if and when cases go vertical | Hazem Bader/AFP via Getty images

BY CARLO MARTUSCELLI

POLITICO EU

JANUARY 6, 2023

The EU's disease control agency has good news and bad news when it comes to XBB.1.5, the coronavirus sub-variant nicknamed Kraken that is ripping through America and keeping epidemiologists up at night.

The bad news is that XBB.1.5 is spreading quickly, most likely because it has some big advantages over the currently dominant Omicron strains. The good news is that Europe has some time to prepare for if and when cases go vertical.

"There is a possibility that this variant could have an increasing effect on the number of COVID-19 cases in the EU/EEA, but not within the coming month as the variant is currently only present in the EU/EEA at very low levels," writes the European Centre for Disease Prevention and Control (ECDC) in its recent assessment of XBB.1.5.

On Wednesday, the WHO’s COVID-19 technical lead Maria Van Kerkhove said that the health agency was concerned with how quickly the sub-variant was replacing other variants in circulation. In the U.S., it went from 4 percent of cases sequenced to 40 percent in a few weeks, according to the White House's COVID-19 Response Coordinator.

Is the cost of living crunch starting to ease?

By Johanna Treeck

However, it is not yet known whether it causes more severe infection.

The ECDC writes that the elevated pace of spread is likely due to XBB.1.5's ability to dodge immune system protection granted by previous infections or vaccination. It also has a mutation on its spike protein — the part of the virus that binds to host cells — which might provide some advantage.

For now, the sub-variant is just a blip on the radar in Europe in terms of case numbers, said the ECDC, though it has been detected in Denmark, France, Austria, the Netherlands, Germany, Italy, Spain, Sweden, Iceland, Belgium, Czech Republic, Portugal, and Ireland. Data coming out of the U.S. suggests XBB.1.5 spreads aggressively, with cases doubling every nine days.

The danger is that an explosion of cases coincides with an already-difficult influenza and respiratory syncytial virus season, straining hospitals. In Belgium, public health authorities declared a flu epidemic due to surging cases, with the peak expected in three or four weeks.

But just because the sub-variant is exploding in the U.S. doesn't necessarily mean that Europe will soon be in the eye of the storm. "[M]ajor differences in variant circulation have been observed between North America and Europe several times during the pandemic," writes the ECDC.

Note: if you are interested in this subject, Germán & Co has written a series of essays on this topic.

The Riddle Of Non-Nord Stream Return... | Energy Central