In February 2007, Fed Chairman Ben Bernanke was projecting a “soft landing” for the US economy.
Central bankers, left and right, were talking about the “soft landing” scenario at the time.
Fast forward to today, and we’re seeing a similar surge in “soft landing” excitement.
This chart shows the number of news stories mentioning “soft landing”.
Notice the peaks:
- Right before the 2008 financial crisis
- Prior to the 2001 Dot Com bust
- And now, in 2024
What Exactly is a “Soft Landing”?
It’s when the Fed raises interest rates to cool the economy, then lowers them just in time to avoid a recession.
Sounds great, right?
But most Fed rate hike cycles end in recession…
In the last 50 years, we’ve only seen 3 out of 11 rate hike cycles end in a soft landing:
- 1995
- 1984
- 1967
Could 2024 be the fourth?
Recent Data Fuels Optimism
Last week’s government data got investors excited:
- Unemployment rate: 4.1% (down from 4.2% in August)
- Non-farm payrolls: Added 254,000 jobs in September
- Total employed: 159 million (a record high)
The stock market is also at all-time highs, which reflects the job market strength.
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A Word of Caution: October 2007 Déjà Vu
But before we get too excited, let’s rewind to October 2007:
- Strong jobs numbers
- Record employment
- Stock market at all-time highs
Sound familiar?
This was just months before the 2008 recession hit
The Credit Factor: A Key Predictor
So, how can we forecast what the economy is going to do next?
The key is to look at credit conditions:
- Tight credit = less money available = economic slowdown
- Loose credit = money readily available = economic strength
This chart is a powerful recession predictor.
Notice how credit typically tightens before recessions.
Credit tightened significantly in late 2023 but is now loosening.
Isn’t that what a soft landing looks like?
Not quite…
In 1995 (a true soft landing), credit remained loose throughout.
Today, we saw significant tightening before the recent loosening.
This key difference lowers the odds of a soft landing today.
The Unemployment Rate Lag
Another reason that credit conditions are important is because they tend to lead unemployment by about 18 months.
This relationship explains:
- Why no recession occurred in 1995 (credit stayed loose)
- Why unemployment has been rising in 2024
- Why we think unemployment could continue weakening until July 2025
The Verdict: Soft Landing or Hard Truth?
Based on the above data, a true soft landing seems unlikely.
If by July 2025:
- Unemployment hasn’t significantly increased
- Credit conditions have become much looser
Then we might actually see the soft landing Wall Street hopes for.
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Read more: October 2024 vs October 2007
