Recent weeks have seen a growing wave of enthusiasm for a soft-landing in the economy, as investors focus on strong economic data and positive signals from the Federal Reserve and other major central banks. This is in stark contrast to the doomsday scenarios that market participants were predicting a few months ago, when fears of a deep, prolonged recession were at their peak.
A soft-landing happens when the economic growth rate decreases, but activity remains relatively robust. This is generally seen as a more desirable outcome than a deep recession, as it prevents an economy from experiencing bigger shocks than it might be able to handle.
The main force behind the considerable shift in sentiment has been strong data from different economic readings. For example, jobless claims have fallen from their peak in mid-March, and although they are still elevated, the labor market shows tentative signs of improvement. Additionally, manufacturing has continued its rebound, while the service sector – the backbone of the US economy – has also seen some signs of stabilization.
The Federal Reserve’s clear and consistent commitment to do whatever it takes to support the economy has also helped bolster investor confidence. The Fed has implemented several programs to help businesses and households to weather the storm, including coupon payments and expanded access to credit.
The Fed has also reduced its benchmark interest rate to an all-time low of near zero, and although most economists agree that further rate cuts are unlikely, the central bank has made it clear that it is willing to act as needed to ensure a soft landing for the economy.
Another key factor that has eased investor concerns is the massive fiscal stimulus package passed by the US Congress earlier this year. This package provided $2.2 trillion in relief to help individuals, businesses, and state and local governments.
At this stage, there are no guarantees that the economy will indeed experience a soft-landing. However, the recent improvements in sentiment, and the Federal Reserve’s and Congress’ commitment to doing what it takes to support the economy, have definitely reduced the risk of a deep, prolonged recession. In other words, a soft landing is starting to look much more likely.