Why a Soft Landing May Be Getting Harder to Pull Off

An economic soft landing for the US got a little harder on Friday, at least as far as consumer perceptions are concerned. The University of Michigan’s consumer sentiment index tumbled to 65.6 in June, defying economists’ estimates of a rise. The gloom that has held back President Joe Biden’s approval rating, despite a long and consistent list of positive indicators, just refuses to lift. A measure of consumers’ current assessments of their personal finances fell 12 points to 79, the lowest reading since October, and views on economic conditions are the worst since late 2022. That said, it’s become widely understood that America’s political polarization has become a prime mover of consumer sentiment, with Democrats more likely than Republicans to see things positively.

When you join those grim sentiment numbers with a surprise 0.2% decline in the producer price index for May, that makes for yet another curve ball in the big Fed rate-cut game. Expectations for 2024–once two, then one, maybe none?–may well be back to two again. Or even three, as Morgan Stanley is calling for. Yes, the central bank penciled in a single cut at its latest meeting, but that’s why our central bankers use pencil. Note that several components of the Fed’s favored inflation measure, the personal consumption expenditures price index, helped to drive the May producer price drop. It got cheaper to fly, to access health care and to have a pro manage your portfolio, among other things. Beyond prices, a surge in initial jobless claims sent the four-week moving average to 227,000, the highest since September–a further indication that overheating is no longer a primary concern and the Fed may feel a growing push to drop rates. And yet, US money-market funds soared to an all-time high on expectations that the Fed, while it may ease, is in little rush to do so. In other words, the game continues.