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Falling inflation. Moderating wage growth. Resilient consumer spending.
This is what a soft landing would look like.
It is too soon to say whether the Federal Reserve will succeed in its effort to bring inflation under control without causing a recession. But recent economic data — including two reports released Friday — has looked more positive than even optimists had dared to hope a few months ago.
Data from the Commerce Department on Friday showed that inflation continued to cool in June, even as consumer spending rose — signs that the economy retains substantial momentum 16 months into the Fed’s campaign to slow it down.
Separate data from the Labor Department showed that wage growth slowed in the spring — an encouraging sign for policymakers who have been worried that rapid pay increases could feed into inflation.
Fed officials have been raising interest rates for more than a year in an effort to wrest inflation under control. The data on Friday was the latest evidence that it is finally coming down meaningfully — and so far without a slump in demand that risks derailing the broader recovery or leading to widespread job losses.
“There’s a lot of encouraging data — you’ve got wages softening, you’ve got realized inflation softening,” said Omair Sharif, founder of Inflation Insights. “This is kind of the leading edge of the softness that the Fed wants to see.”
Other recent data has also pointed to the recovery’s resilience. Overall economic growth picked up unexpectedly in the second quarter, lifted by a surge in factory construction. Orders for durable goods, a measure of business investment, rose in June. And applications for unemployment insurance have fallen in recent weeks, suggesting layoffs remain low.
The steady stream of good news has combined with less painful price increases at the gas pump and in the grocery aisle to lift the spirits of consumers, who have long been dour despite the low unemployment rate. Consumer sentiment, as measured by the University of Michigan’s long-running survey, rose 11 percent in July, to its highest level since October 2021.
The combination of slowing inflation and solid economic data is also stoking a growing sense of optimism among economists, many of whom once considered a recession all but inevitable. The Fed’s staff even revised its forecast at the central bank’s meeting this week, and is no longer calling for a downturn this year.
“It certainly supports the view that we’re in the midst of a soft landing,” said Kathy Bostjancic, chief economist for Nationwide Mutual, said of Friday’s data.
Still, inflation remains well above the Fed’s target of 2 percent annual price increases, and many economists, including Ms. Bostjancic, remain skeptical that it will cool completely without unemployment rising. As long as the job market remains strong and consumers keep spending, wages and prices are likely to keep rising.
“Certainly the odds have gone up for a soft landing — but we’re still hesitant to declare that a recession is not in the cards,” she said.
Policymakers, too, remain watchful, because the same resilience that is driving optimism now could lay the groundwork for stubborn inflation later. If companies can continue to raise prices because their customers are in good financial shape and are able and willing to pay more without pulling back, it could keep inflation uncomfortably rapid.
“The overall resilience of the economy — the fact that we’ve been able to achieve disinflation so far” is “a good thing,” Jerome H. Powell, the Fed chair, said at a news conference this week. Still, “at the margin, stronger growth could lead, over time, to higher inflation, and that would require an appropriate response from monetary policy.”
Policymakers lifted rates to a 5.25 to 5.5 percent range this week, the highest level since 2001, and signaled that they were open to doing more if incoming data suggested that inflation was likely to last.
The data released Friday showed that the Fed’s preferred measure of inflation, the Personal Consumption Expenditures index, climbed 3 percent in the year through June, the Commerce Department said Friday. That was down from 3.8 percent the month before and from a peak of 7 percent a year earlier.
After stripping out food and fuel — both of which jump around — a core inflation index climbed by 4.1 percent, slightly less than economists had expected. That is down notably from a peak of 5.4 percent in 2022, and it was the lowest reading since September 2021.
Much of the recent disinflation has come as unusual shifts that took place during and after the pandemic have slowly faded. Supply chain disruptions have healed, allowing a pop in the price of goods like furniture to disappear. And after plummeting at the start of the pandemic and then surging back, airfares and hotel prices have been either declining or growing at a more normal pace, which is also helping inflation to cool.
Fed policy is also playing a role. Demand for cars and houses has pulled back amid higher interest rates, which is probably helping prices for vehicles and housing-related products — from rent to washing machines — to moderate.
And gas prices have cooled in recent months, which has helped to lower overall inflation. But gas is a cautionary tale that underscores why economists remain cautious and hesitant to declare victory: Prices have risen in recent days amid a major refinery shutdown, a trend that could slow future disinflation if it persists into August.
Still, other signals point in the right direction for the Fed. Compensation costs, including both pay and benefits, rose 1 percent in the second quarter, the Labor Department data showed, down from 1.2 percent in the first three months of the year. Compensation was up 4.5 percent from a year earlier, the slowest growth in more than a year.
And while wage growth has softened, inflation has fallen by even more. Workers are better off as a result: Pay, adjusted for inflation, rose in the second quarter for the first time in two years.
“Households are getting back some purchasing power,” said Beth Ann Bovino, chief economist for U.S. Bank.
The slowdown in wage growth has surprised some economists because the unemployment rate remains very low, which would ordinarily put pressure on companies to raise pay to attract and retain workers.
But other evidence suggests that the labor market has softened even without a big increase in joblessness. Employers are posting fewer job openings, are adding fewer new jobs and are poaching fewer employees from competitors, all signs that demand for workers has slowed. At the same time, the supply of workers has increased, as immigration has picked up and more people are coming off the sidelines to join the labor force.
Employers in recent months have reported having an easier time finding workers. In a survey of businesses released this week by the National Association for Business Economics, a majority of respondents said wages at their firms were unchanged in the second quarter — the first time that has happened since 2021.
“Labor’s still a problem, the labor market’s still tight out there, but firms are starting to figure out how to make do with what they have,” Lester Jones, chief economist for the National Beer Wholesalers Association, said in a conference call held to discuss the survey. He added, “We see firms just being smarter with the employees that they have and just trying to be more efficient and not trying to chase employees the way we did coming out of Covid.”
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