From ‘Slowcession’ to Soft Landing

Moody’s economist Mark Zandi is feeling bullish about the U.S. economy, predicting an 80% chance of a soft landing in 2024, a stark shift from his earlier cautious outlook. And he is not alone. What’s behind this change? Zandi’s recent discussion with RMA’s Philadelphia chapter explored the key factors shaping his optimism. 

Inflation Moderation: Zandi attributes his newfound confidence to moderating inflation, suggesting it was mainly supply driven. Now that the effects of the pandemic and the Russia-Ukraine war are fading, and inflation is easing towards the Fed’s target rate, Zandi foresees stability without significant increases in unemployment. 

Wage Growth: Consumers are the engine of economic growth, and Zandi notes a positive trend: wage growth is now outpacing inflation. This is a reversal from recent years, and, coupled with improving real purchasing power, suggests consumers are regaining confidence in the economy. 

Yield Curve Dynamics: While an inverted yield curve poses challenges for banks, Zandi predicts a gradual shift, with multiple interest rate cuts expected in 2024 and 2025. Despite the curve’s inversion, Zandi remains optimistic about the banking sector’s resilience. 

CRE Challenges: Zandi acknowledges the challenges in the commercial real estate sector but believes they won’t disrupt the banking system. While defaults may occur, many banks have stress-tested their exposure, and regulators are allowing forbearance to prevent distressed property sales that could put more downward pressure on values. 

Confidence Caveat: Zandi highlights the unpredictable nature of depositor behavior, citing recent events like the buildup to and fallout from SVB’s failure. With depositor confidence on edge, Zandi cautions that potential CRE defaults or bank failures could trigger broader reactions. 

Do you agree with Zandi’s assessment of economic indicators? Do you also see potential stability ahead despite lingering risks? We’d like to know. Put on your chief economist cap and drop us a line at insider@rmahq.org.