Consumers in the U.S. have been somewhat freed from the grips of historically high inflation that plagued much of 2022. After some false signs of hope in 2021 and 2022, it appears that efforts by the Federal Reserve to get inflation under control are working. According to The New York Times,[i] as of January 2023, inflation had slowed on an annual basis for six months in a row — dropping to 6.5% from a high-water mark of 9%.
With inflation appearing to turn a corner, some prognosticators are predicting a soft landing — meaning that inflation will return to a more typical level without the U.S. entering a recession. While there are certainly encouraging signs, it’s not a foregone conclusion, and it’s entirely possible that we still enter a recession, albeit a relatively mild one.
“Based on the conversations I’ve had recently with market participants, the general view is that a recession of some type is likely,” says Cameron Jeffreys, a senior vice president at Global Atlantic. “That said, the belief is that any recession is likely to be mild.”
Here’s a closer look at what constitutes a soft landing and how you can talk about this uncertain period with your clients.
Recession risk and the labor market
A soft landing is what the Fed is hoping to accomplish as it fights high inflation by raising interest rates, which means trying to slow the economy to flat to low growth without pushing it into a recession. One of the more encouraging signs that we’re headed for a soft landing — or at least a very mild recession — is that unemployment remains low. In the January jobs report, the Bureau of Labor Statistics[ii] reported that the economy added 517,000 jobs, bringing the unemployment rate to 3.4%.
"The data that keeps coming out month after month shows that we continue to move forward. The evidence is not consistent with what a recession typically looks like," White House economist Heather Boushey told Reuters.[iii] "The signs all point to ongoing recovery and robustness in the labor market."
However, a strong labor market does pose an ongoing challenge for the Fed, as low unemployment and wage inflation likely forces policymakers to continue to raise rates.
Meanwhile, Wall Street appears to be acting in a way that suggests investors are confident a soft landing is in our future. According to The Wall Street Journal,[iv] Goldman Sachs analysis reveals that investors are increasingly moving their money into stocks that would benefit from easing inflation.
A soft landing that’s not so soft
Even if the U.S. manages to avoid a recession and achieves a soft landing, there’s a chance that not everyone will be affected equally. The New York Times reports that some economists expect a “K-shaped” soft landing, meaning that small businesses and workers with little savings could feel the impact of ongoing economic instability.
“As we look ahead, I think it is entirely possible that the households and the people we usually worry about at the bottom of the income distribution are going to run into some kind of combination of job loss and softer wage gains, right as whatever savings they had from the pandemic gets depleted,” Karen Dynan, a former chief economist at the Treasury Department and a professor at Harvard University, told the Times.[v]
Some major banks are also not so sure that a completely soft landing is in the works. According to Axios,[vi] leadership at JPMorgan Chase, Bank of America, and Citigroup are preparing for a mild recession in 2023, with some anticipating an unemployment rate that could eclipse 5%.
“I think people need to be cautious,” Jeffreys says. “The execution of a soft landing by the Fed is very challenging. It’s like walking a tightrope – it requires a bit of luck to be honest.”
Talking to your clients about a potential soft landing
Regardless of whether we experience a soft landing or not, financial professionals may help their clients navigate the continued uncertainty in the markets. Importantly, financial professionals may be the steady hand, continuing to follow the thoughtful plans that have been created for each client’s circumstances, particularly as it relates to diversification.
“Diversification is an old adage, but it remains vitally important. Not only asset diversification, but also product diversification,” Jeffreys says.
Product diversification can encompass several different annuities. For example, your clients might benefit from a fixed index annuity with downside protection, or a MYGA with a guaranteed interest rate for a certain period of time. You might also suggest a RILA, which offers relatively more upside participation for taking some downside risk. With such volatility in the markets and the ongoing threat of even a mild recession, clients may be apprehensive, and looking for guidance through this period.
“Having a difficult conversation can be challenging, but it may be an opportunity to alleviate their concerns by providing perspective, letting them know that a thoughtful, well-diversified financial plan is designed to mitigate the impact of a variety of market environments, including this one,” Jeffreys says.