Skydiver jumping out of a plane
Increasingly, many economists and other market watchers have presumed that the Federal Reserve would reach a rare achievement of a so-called soft landing for the economy.
The term means seeing a reduction in inflation with no significant increase in unemployment and continued economic growth in the form of increasing GDP. However, incoming economic data and the Fed’s projections make this look increasingly unlikely. That’s because the economy — 69% of GDP — is consumer spending and the majority faces trouble.
The cost of living — the Consumer Price Index for all Urban Consumers, all items — has continued to outpace median household income in real terms (taking inflation into account), as the graph from the Federal Reserve Bank of St. Louis below shows.
Real median household income versus inflation (CPI) growth.
And a graph on real median personal income versus CPI.
Real median individual income versus inflation (CPI) growth.
The Fed has admitted that inflation might well go up in 2025. Their December overview of estimates from Fed officials showed a concern that inflation will start to turn up again and not continue down on the trend that ended when price increases turned up in September 2024 and kept going. Not in a big way, but enough.
When there isn’t enough income, what do people do to spend? Use a credit card. Wednesday, January 8, 2025, brought a new record of outstanding credit card and revolving credit spending: almost $1.09 trillion. Another St. Louis Fed graph below to show the progress.
Credit card and revolving debt growth.
As The Kobeissi Letter commented on X/Twitter, that put U.S. revolving credit use up $51 billion over last year, or an increase of $344 billion over the last four years, with the average interest rate hitting 22%, nearly an all-time high. As someone pointed out, if you consider that some people are probably transferring debt between cards to get a 0% rate for some period of time, the 22% is probably understated.
“In effect, US households now hold a record average credit card debt balance of $10,563,” they wrote. “Even worse? This does not include ‘Buy Now, Pay Later,’ which saw a record $19 billion in holiday purchases in 2024.”
What’s happening with work? Washington Post columnist Heather Long noted on X/Twitter that hiring is “anemic,” especially outside healthcare or government. “People aren’t moving,” she wrote. “Promotions and bonuses are down. People even keep cars for record time. People feel cemented in place.”
Absolutely true. That’s been one of the problems in housing. It used to be that some portion of homeowners would sell their houses to move to others, but that was when mortgage rates remained at roughly the same level they had been, making such a shift economically affordable.
Rates are unlikely to be coming down soon, even if the Fed decided to lower the benchmark federal funds rate because that affects short-term lending, not home mortgages. The yield on the 10-year Treasury does that because of the way lenders structure their rates. There are two parts to the decision: a base risk-free rate (which typically is the yield on the 10-year) and a risk premium above that. The higher the risk-free rate, the higher the total. As of January 23, 2025, the St. Louis Fed using data from government-sponsored enterprise Freddie Mac shows the average 30-year mortgage rate as 6.96%. If someone’s current mortgage is in the 3% to 4% range, they’re unlikely to sign up for almost double.
That brings things back to jobs. The number of people continuing to college unemployment benefits hit the highest level since November 2023, according to Jeffrey Roach, Chief Economist for LPL Financial.
“The labor market is historically tight, but some sectors are slowing the pace of hirings,” he wrote in prepared email remarks. “The weekly claims data suggest minimal stress in job markets. As long as wage growth outpaces the rate of inflation, the economy will chug along, and the Fed will not cut rates as much as expected only a few months ago.”
Things are tight and there’s no likely relief on the horizon, meaning the dream of a soft landing where everything keeps moving along without great disturbance might not happen.