A Soft-Landing Scenario Gains More Adherents but How Long Will it be Viable?
In February this year we wrote an article entitled A Funny Thing Happened on the Way to the Recession. It observed that the consensus of commentators was calling for a recession but concluded that such an outcome was unlikely. Our rationale was based on two things. First from a contrarian aspect, when widespread views of an impending economic decline take hold it’s not unreasonable to expect people will take steps to protect themselves ahead of time. After all, who wants to remain on the railroad tracks when it is obvious a train is coming? A second, and a more practical reason for our optimistic outlook was that some historically reliable forward-looking economic indicators had begun to improve.
Fast forward to the current situation, where opinion has shifted away from recession in favor of a soft-landing scenario. Does that same contrary analysis mean a recession is now more likely? The simple answer is no, not yet anyway! First, the current soft-landing views are not as widespread and solidified as were recessionary expectations earlier this year. We can see that from Chart 1, which compares University of Michigan consumer sentiment to the Conference Board’s Coincident Indicators. If expectations had grown too optimistic this would show up in the data. However, the long-term smoothed momentum for sentiment is currently at a subdued reading. Indeed, it has just violated a key down trendline. Such action indicates a firming of upside momentum, which suggests a further improvement in confidence and the economy lies directly ahead.