Author: Andrew Berger-Gross
Welcome to the July 2023 edition of NC Economy Watch: an update on what’s happening in the North Carolina economy and what it means for you, brought to you by the Labor & Economic Analysis Division (LEAD) of the NC Department of Commerce.
In this edition of NC Economy Watch, we assess whether the economy is heading for a hard crash or a “soft landing”. The economic slowdown over the past year has been “soft”; although our economy is slowing, it’s still growing and showing no signs of a recession. Inflation has also slowed notably, but a “landing” is elusive as prices continue to rise.
Is Our Economy Heading for a Soft Landing?
If your paycheck isn’t going as far as it used to, you’re not alone. Price inflation has reached decades-high levels, straining household finances and casting an ominous pall over our economic outlook.
History suggests it can be difficult to get inflation under control without seriously undermining economic growth. In the early 1980s—the last time we saw inflation this high—it took a series of sharp interest rate hikes and a severe downturn to curb price increases.
While the hard crash of an economic recession is the most likely path to lower inflation, there is another possibility: a “soft landing”. In such a scenario, the economy would slow down but avoid a painful recession (that’s the “soft” part), while price growth would gradually return to historically normal levels (that’s the “landing”).
Where are we now? So far, it appears that our economy is slowing, but still growing. For example, the total number of nonfarm jobs in North Carolina increased 2.4% over the year in May 2023 [Figure 1]. This is a steep decline from the pace we saw in the aftermath of the COVID-19 recession, when job growth rates topped 12%, and a marked slowdown from the growth rate seen at this time last year (4.6%). Nonetheless, slower growth is better than no growth at all; at 2.4%, job gains remain well above the pre-pandemic average of 1.9%, demonstrating the continued resilience of our economy in the face of higher prices and rising interest rates.
Figure 1
Our economic descent has been “soft”, but has inflation “landed”? Over-the-year price growth, as measured by the consumer price index (CPI), declined to 3.1% in June 2023—much lower than the 8.9% rate seen in June 2022 [Figure 2]. While this might appear to be encouraging news at first glance, inflation remains higher than Federal Reserve’s 2.0% target. There are also troubling signs of persistence in the consumer price data when we exclude volatile items like gasoline to get at the underlying dynamics of inflation. One closely followed measure of underlying inflation, the Cleveland Fed’s median CPI, has declined slightly from its 2023 highpoint but remains elevated at 6.4%.
Figure 2
The recent slowdown in our economy has clearly been “soft”, sparing us the pain of a recession for the time being. However, it’s unclear whether inflation is truly “landing”. Overall price growth has moderated substantially over the past year, but measures of underlying inflation suggest we could be stuck with higher prices for some time.
Some of the forces driving inflation are still unresolved: consumers are spending money at a healthy clip while the labor market remains as tight as ever, contributing to an imbalance between supply and demand in our economy. Of course, these are some of the same forces keeping the economic growing, shattering widespread expectations that we would be in a recession by now.
As we noted in our June edition, soft landings are unusual, but so is the pandemic-era economy. While our experience from the early 1980s suggests it could take a recession to get inflation under control, the resilience of our economy over the past year offers hope we might be able to pull off a soft landing this time around.
For inquiries and requests, please contact:
Meihui Bodane, Assistant Secretary for Policy, Research and Strategy
NC Department of Commerce, Labor & Economic Analysis Division (LEAD)