Had governments around the world not induced short, sharp recessions in the wake of the Covid-19 pandemic in early 2020, America might be celebrating the 15th anniversary of the longest economic expansion in its history.
But an expansion characterized by its durability hasn’t shown the vibrancy of other long booms like that of the 1990s. Observers like “finfluencer” Kyla Scanlon have coined the term “vibecession” to describe the post-pandemic economy. And skeptics constantly point to the U.S. federal debt, which has ballooned from about $10 trillion in 2009 to $35 trillion today.
Economic narratives tend to get whipped around during long cycles, and this one is no different, notes Erik Weisman, chief economist and portfolio manager at MFS Investments. Soft landings conjure up the image of a plane trip that ends only as a passenger awakes in the midst of a super smooth touchdown.
When it comes to economics, however, this image is at odds with reality. Few people remember that the boom of the late 1990s, set up by a soft landing in 1995, was preceded by a 1994 bear market in bonds—the worst in half a century (though some consider the 2022 bond market even worse).
The advent of the internet produced much of the late 1990s’ growth, and many market participants are counting on artificial intelligence to play a similar role over the next several years. Weisman argues that the current slowdown won’t qualify as a soft landing unless the economy sees several more years of expansion after the Fed begins to cut interest rates.
In the last half-century, the mid-1980s and mid-1990s saw the only successful soft landings in the U.S. economy, and neither resembled a perfect touchdown. Weisman says these benign environments show some patterns, such as a few quarters of GDP growth “with a zero handle” and a month or two of negative job growth. While companies can shed some jobs, as financial companies and tech businesses have done the last few years, they don’t go into full downsizing mode in these cases.
The last traces of the pandemic economy—like revenge travel—seem to be wrapping up as airlines warn of a slowdown and companies like Disney expect theme park traffic to moderate. But this is mostly the normalization of the business cycle.
The classic recession signals—like too much labor, excessive inventories or credit bubbles—aren’t flashing. However, Bank of America CEO Brian Moynihan took the unusual step of going on Face the Nation in August and urging the Fed to start cutting rates, saying higher interest was inflicting pain on lower- and middle-income consumers and implying that delinquencies and ultimately defaults would be the result. Still, Moynihan did not predict a recession.
Some fear the Fed risks remaining restrictive for too long. Kristina Hooper, the chief global market strategist at Invesco, contrasts the central bank’s hikes in 2022 and 2023 with its tightening policy in 1994, when it raised interest 300 basis points and kept it at that higher level for five months. The difference is that back in 1994, the federal budget was about to get balanced; now it’s approaching $2 trillion.
This time the Fed has raised rates 500 basis points to a level it’s remained at for 13 months (so far). “Does normalization lead to abnormalization?” she asks, citing warnings from Home Depot and other companies that consumers are slashing their spending.
Her view is that when the Fed reverses its direction, the psychological impact on consumers and businesses will be positive. The last time the spread between the Personal Consumption Expenditures Price Index, the central bank’s favorite inflation indicator, and the fed funds rate was this wide was in 2007, not a year to emulate, she says.
The question of why the Fed was able to raise interest rates at a pace only rivaled during the Paul Volcker era without triggering the recession many economists predicted is an open one. Numerous once-reliable indicators—from the yield curve to the rate of change in the cost of capital to the Sahm rule (which measures the acceleration in unemployment)—support the odds there should have been a recession by now.
Yet the economy has been more robust than it was in the previous two decades. Why? One likely answer is the wealth effect from extraordinary fiscal and monetary stimulus and asset inflation, according to Rob Arnott, chairman of Research Affiliates.
The massive increase in stock market and housing wealth, coupled with pandemic psychology, spawned an aberration in consumer behavior, Arnott says: “People were spending like there was no tomorrow,” partly because they feared, rationally or not, that there might “not be a tomorrow.”
Virtually everyone interviewed for this article thought interest rates were too high, and some said Fed Chair Jay Powell, like many of his predecessors, waited far too long to start hiking rates and then overreacted. However, it is also clear that as monetary policy is used more and more frequently, its efficacy is declining.
Take the most problematic sector of the economy—housing. Many affluent Americans have bought their homes with hefty down payments or all cash. Those who borrowed locked in ultra-low mortgage rates, so the upshot is that the percentage of homes without a mortgage sits just under 40%, a historic high.
For many of these homeowners, the surge in interest rates has been little more than a chance to finally earn a respectable return on their cash for the first time in more than a decade. But folks under the age of 40 seeking to buy their first home find themselves living in the so-called vibecession with few options besides entering bidding wars for highly appreciated properties or continuing to rent.
Neither presidential candidate has addressed the problem of deficits or unsustainable entitlements. “One candidate wants to run $3 trillion deficits as far as the eye can see; the other wants to run $2 trillion annual deficits,” Arnott says. “The problem is I’m not sure which is which.”
Weisman says that’s why bond investors should expect a steeper yield curve once the Fed starts cutting rates.
A weaker U.S. dollar is also likely. Hooper thinks that could benefit both developed small-cap companies, cyclicals, international stocks and emerging market debt and equities.