Aiming for an Economic Soft Landing

Exploring soft landing's impact on inflation rates and on the dynamics of the economy

by Kristen Stephenson

Last year, GPEC launched the Economic Monitor, a comprehensive web tool designed to provide timely, actionable insights into the state of the economy. Through an exploration of key economic indicators, the Economic Monitor offers a concise picture of health at both national and regional levels.

We previously covered how each of the indicators individually impacts the economy; now we’re going to dive into how they all work together.

What exactly is a soft landing?

There has been a lot of talk about the potential for a soft landing in the current economic situation. But what does that actually mean? A standard business cycle includes expansion, peak, contraction and trough. In an expansion, businesses are growing and Gross Domestic Product (GDP) is rising. At the peak of an economic cycle, the economy is still growing but factors like inflation and wages increase and unemployment rates drop, causing prices to rise and in turn slowing down consumer and business spending. This leads to the next phase of the business cycle – the contraction phase – where GDP begins to drop. Finally, the economy will hit a trough, which is the lowest point of the economic cycle. GDP growth is negative or very small and unemployment is higher at this point. Peaks and troughs are identified after the fact as high and low points, respectively, in the business cycle.

A recession typically occurs during the contraction phase of a business cycle. Many define a recession as two consecutive quarters of GDP decline. However, recessions are officially tracked by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee which deems a recession as a significant decline in economic activity that lasts more than a few months. As NBER defines it, they consider “depth, diffusion and duration,” in which all three criteria need to be met to some degree, but extreme conditions in one factor may offset less concerning factors in another. For example, the economic contraction in 2020 was deemed a recession even though it only lasted from February to April because of how widespread the job losses were across industries and how deep the losses were.

In a soft landing situation, the economy has slowed down without going into a full-fledged recession. There is no official definition for soft landing, but it is generally perceived as when inflation rates come down without a drastic increase in unemployment and GDP does not decline.

What do the current numbers say?

Real GDP went up in the second quarter of 2024, increasing by an annualized 3%. This compares to a 1.4% annualized increase in Q1 2024. Inflation has come down closer to the long-term average with a year-over-year growth of 2.5% as of August 2024. Inflation rates in Greater Phoenix are performing even better than the U.S. average, with a rate of 2.3%, marking a year that inflation has been lower in the metro than the U.S. overall. Greater Phoenix also has the fifth lowest year-over-year inflation rate of the 21 metropolitan areas tracked by the Bureau of Labor Statistics.

Job reports have softened in recent months but still show employers adding jobs. Nationally, nonfarm employment increased by 142,000 in August 2024, compared to an average of 202,000 monthly over the past 12 months. The unemployment rate is 4.2% which is still low, however, it has increased compared to the same time a year ago when the rate was 3.8%.

Greater Phoenix is also still experiencing job growth. Of the 51 metropolitan areas with a population of 1 million or more, Greater Phoenix had the third-highest percentage increase in employment, increasing by 2.6% year over year as of July 2024. The unemployment rate was 3.9%, up just slightly from 3.8% at the same time last year, but below the national average.

While there is still a chance of a recession, a soft landing appears equally likely. Greater Phoenix also appears to be in a position to weather any economic roadblocks better than the U.S. as a whole.

To monitor economic conditions in real time along with me, visit gpec.org/monitor. We hope you find the Monitor a valuable tool in understanding the ever-changing economic landscape.

See Economic Monitor