Hard or Soft Landing?
Almost every recession in history has been preceded by speculation that the economy is in for a "soft landing." After the early warning signs, nothing much happens. The stock market keeps climbing despite rising interest rates, raising hopes of a "lucky escape".
The four most expensive words in the English language are: "This time it's different." ~ Sir John Templeton
The economy takes time to adjust to changed circumstances and there can be a lag of two years or more between the first rate hikes and the inevitable rise in unemployment. Plenty of time for self-delusion as stocks keep rising and unemployment stays low.
The difference between a hard and soft landing is best measured by unemployment. At 3.5%, the March reading shows no sign yet of an approaching recession.
The lag between an inverted yield curve -- caused by Fed rate hikes -- and unemployment can vary quite widely between recessions, depending on other influences. The chart below shows how an inverted yield curve in July 2000 was followed by the first sign of rising unemployment in January 2001, and shortly afterwards by a recession in March. The next yield curve inversion started in February 2006, the first sign of rising unemployment in July 2007, and the recession only in December of that year. Red bars below represent the lag between yield curve inversion and the first sign of rising unemployment.
The current yield curve inversion (10-Year minus 3-Month Treasury yield) started in November 2022, so the earliest we are likely to see a rise in unemployment is late-2023.
Why is unemployment expected to rise?
Quote for the Week
Rule #8: There is always more than one cockroach.
~ Doug Kass - 50 Laws of Investing
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Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.
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