A Slow Landing for the U.S. Economy

Technology innovation can quicken the pace toward economic prosperity

By Steve Koenig, VP, Research

For months, vigorous debate has ensued over how the U.S. economy will stabilize, but a recent string of hot economic data suggests a “slow landing” may be ahead. This means the jobs market remains robust with wage growth supporting consumer spending, but the economy will tip into a mild recession later this year, as most economists agree. 

The Fed has already admitted that bringing inflation into acceptable range (2%) will take much longer than previously expected. Of course, this unsavory news has left a bad taste in the mouth of markets. The real question is whether the murky mix of macro and market data portend a protracted battle to curb inflation as the Fed believes, or whether has inflation become entrenched — the Fed’s worst fear. 

The U.S. economy gained 517,000 jobs in January and the unemployment rate declined to 3.4%, the lowest in 53 years (1969). This was a surprise to economic analysts and a big piece of evidence in support of the slow landing scenario. Clearly, there remains pent-up demand for labor despite the economic climate, but it depends where you look. Leisure and hospitality added 128,000 jobs to lead all sectors. Meanwhile, the tech sector has already cut nearly 100,000 jobs this year.

Parallel to the hot jobs market, wage growth has buoyed consumer spending amid rising costs, with 1Q23 U.S. GDP growth recently revised upward to 2.5%. In January, average hourly earnings grew 4.4% from a year earlier, but down from a revised 4.8% in December. Adding to the boost in disposable income, social security is expected to pass a cost-of-living adjustment (COLA) of 8.79% this year (the highest since 1981), estimated to inject $123 billion into the economy.

On the spending front, while retail sales growth declined in November and December, January’s reading surged 3%—the largest monthly gain in two years. The spending data show consumers spent modestly on essentials like groceries and gasoline but splurged on big-ticket items. Put another way, consumers pulled back on everyday items to treat themselves. Some call it the split-brain budget.

How slow will the recovery be? While inflation has cooled from June 2022’s sweltering 9.1% reading, it remains uncomfortably high. January’s CPI reading of 6.4%, a gauge of the annual rate of inflation, was only a 0.1% drop from December. Any notion now of disinflation seems overstated.

The Fed upped rates by another 0.25% in January and market observers expect another 0.25% hike when the Fed meets in March, bringing the Federal Funds Rate to 5%. However, current gains in job and spending growth could prompt another 50 basis-point rise. The Fed has already signaled it sees rates exceeding 5% in 2023. Just how high interest rates will rise in this tightening cycle remains uncertain, but estimates currently fall between 5.25% and 5.75%. While interest rate estimates vary, there is substantial agreement that remedying inflation will take time.

The Fed’s interest rate policy is really a blunt instrument to decrease spending, forcing prices to fall. A too-slow landing for the economy brings risk: higher prices painfully linger, credit defaults multiply, bears rule the market, and – worst of all – the probability of inflation becoming entrenched increases.

Fortunately, technology innovation can combat inflation and shorten the runway required to land the economy by boosting productivity—an idea ratified by economists and Wall Street alike.

As noted in CTA’s exclusive member report, 5G Enterprise and the Industrial IoT Revolution (September 2022), a new industrial revolution is nigh. The increasing capabilities of 5G wireless combined with AI, robotics, cloud computing and other technologies (like advanced sensors and semiconductors) will soon empower enterprises to jumpstart productivity through automation and hasten the pace toward economic prosperity.

In addition, CES 2023 demonstrated manifold examples of productivity boosting technology applications spanning the economy. The show featured numerous use cases for digital twins—virtual versions of physical objects created using AI and spatial computing that are accessed with XR technology—enabling virtual simulations, testing, design, and more.

CES also featured autonomous trucks and other robotic systems that are automating agriculture and mining, making them more productive and safer. Yet another example from the show is synthetic media which refers to AI generated, hyper-realistic virtual humans that can interact with customers in retail, hospitality, banking, and other service sectors.

We can debate interest rates and monetary policy, but there is no argument that technology innovation is truly how we move the economy forward.

Disclaimer:

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