{"id":178655,"date":"2024-10-30T14:20:49","date_gmt":"2024-10-30T20:20:49","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=178655"},"modified":"2024-10-30T14:20:51","modified_gmt":"2024-10-30T20:20:51","slug":"the-no-landing-economic-narrative-could-be-a-real-problem-for-investors","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/the-no-landing-economic-narrative-could-be-a-real-problem-for-investors","title":{"rendered":"The Latest “No-Landing” Narrative Could Be Bad News for Investors\u2014Here’s Why"},"content":{"rendered":"\n

The possibility of a recession has been mulled over<\/span> ad nauseam<\/span><\/em> by seemingly every economist and finance expert over the past couple of years. Hard landing, soft landing\u2014how about a no-landing?<\/span><\/p>\n\n\n\n

It looks like<\/span> there is a real possibility this could be in store for the economy in the immediate future. What would this third scenario mean for real estate investors, and should we worry about it?<\/span><\/p>\n\n\n\n

The Shifting Economic Narrative<\/span><\/h2>\n\n\n\n

Pessimism dominated predictions <\/span>up<\/span> until the latter half of 2023 when it became <\/span>obvious<\/span> that the U.S. economy was more resilient post-pandemic than it had seemed. The narrative from then onwards\u2014<\/span>and up to<\/span> as recently as last week\u2014was that a \u201csoft landing\u201d awaited the economy at some point in 2024. <\/span><\/p>\n\n\n\n

The reality is that 2024 is drawing to a close, and the outcome is that there isn\u2019t a clear outcome. <\/span><\/p>\n\n\n\n

Yes, disaster appears to have been averted, and a deep recession is nowhere on the horizon: The economy is still growing, albeit slowly, and there is no mass unemployment. And yet inflation, although well below the 3.2% rate of a year ago, is still above the Federal Reserve\u2019s target rate of under 2%. As of <\/span>September 2024<\/span><\/a>, inflation was at 2.4%. <\/span><\/p>\n\n\n\n

Now,<\/span> the experts have begun discussing the possibility of a no-landing economy, where the economy continues to grow and inflation remains elevated despite contractionary measures.<\/span> Beth Ann Bovino, chief economist at U.S. Bank, <\/span>told CNBC<\/span><\/a> in early October that given the strong labor market and a slowing pace of price increases, combined with declining interest rates, either a soft landing or a no-landing scenario was possible. A no-landing scenario would result in \u201ceven stronger economic data for 2025 than we currently expect.\u201d<\/span><\/p>\n\n\n\n

Why a No-Landing Scenario Could Be a Problem<\/span><\/h2>\n\n\n\n

So what\u2019s the problem? Why would a no-landing scenario be a concern if it <\/span>basically<\/span> means that all is well with the economy, albeit with elevated inflation? Several media outlets have hailed the no-landing scenario as potentially <\/span>beneficial for traditional investors<\/span><\/a> since <\/span>stocks<\/span><\/a> would perform well <\/span>in this situation<\/span>. <\/span><\/p>\n\n\n\n

It\u2019s true that in<\/span> the short term, a no-landing scenario wouldn\u2019t have a dramatic impact on anything. It would be slightly annoying for homebuyers and investors since interest rates would remain elevated, with any further cuts from the Fed administered at a much slower rate than everyone in the housing sector would like. <\/span><\/p>\n\n\n\n

But there\u2019s more to it than that. If no-landing conditions persist into 2025, they could be symptomatic of <\/span>bigger<\/span> problems and potentially unusual <\/span>outcomes for the economy<\/span>. A \u201cno-landing economy,\u201d as the name suggests, is <\/span>an economy<\/span> in limbo, hovering above a range of potential outcomes. It is not, in itself, a long-term prognosis but a precursor. <\/span><\/p>\n\n\n\n

And<\/span> the reason why<\/span> economists have started talking about the potential for a no-landing economy <\/span>is that<\/span> while everything is well with the U.S. economy on paper, the reality <\/span>is not that great<\/span>.<\/span> While the economy is plodding along and has avoided a recession, it may be only a few steps away from a slump <\/span>of a kind<\/span> not seen since the 1970s. <\/span><\/p>\n\n\n\n

From No-Landing to Stagflation?<\/span><\/h2>\n\n\n\n

Look at the labor market statistics: The <\/span>unemployment rate<\/span><\/a> in September was 4.1%\u2014not bad, and not nearly as high as the alarming rates we saw during the pandemic. And yet, if we dig a little deeper, we\u2019ll see a shrinking labor market where companies aren\u2019t laying off workers en masse, but they\u2019re also not making new hires. <\/span><\/p>\n\n\n\n

We know this partly because while new unemployment applications dipped last week, the number of <\/span>continuous jobless claims<\/span><\/a> was the highest since mid-November 2021. This means it is harder for people to find a new job if they leave their current one. <\/span><\/p>\n\n\n\n

It is highly likely that when the Fed meets next week, it will \u201cshrug off\u201d these figures, as <\/span>Reuters<\/span><\/a> puts it, putting the unemployment stats down to the September hurricanes. This means that it\u2019s unlikely another substantial rate cut is coming. After all, inflation isn\u2019t down to target levels yet. <\/span><\/p>\n\n\n\n

If the Fed is wrong about where the labor market is heading, we may find ourselves in a rare\u2014and highly unpleasant\u2014economic scenario known as \u201cstagflation.\u201d In this scenario, inflation will remain elevated while unemployment will continue increasing. The result is suffering consumers and investors.<\/span><\/p>\n\n\n\n

Essentially,<\/span> you\u2019re getting the worst of both worlds: reduced spending power and rising prices, with no end in sight.<\/span> And at that point, traditional measures like rate cuts no longer seem to work. <\/span><\/p>\n\n\n\n

Is this scenario too far-fetched to entertain? J.P. Morgan CEO Jamie Dimon <\/span>has warned of the possibility of stagflation<\/span><\/a>, most recently at the American Bankers Association Annual Convention this month. <\/span><\/p>\n\n\n\n

Dimon pointed to macroeconomic factors that will shape the economy<\/span>, namely the<\/span> highest peacetime deficit the U.S. has ever had, \u201cthe remilitarization of the world,\u201d and even the transition to \u201cthe green economy.\u201d<\/span> These are all inflationary factors, as he defines them, and they may keep inflation elevated for several years <\/span>to come<\/span>.<\/span><\/p>\n\n\n\n

Some economic experts even think that we are already there<\/span>, in a way<\/span>.<\/span> Former Fed chairman Ben Bernanke told the <\/span>New York Times<\/span><\/em> back<\/span> in 2022 that the economy already met the conditions for stagflation: \u201c[I]nflation\u2019s still too high, but coming down. So, there should be a period in the next year or two where growth is low, unemployment is at least up a little bit, and inflation is still high. So, you could call that stagflation.\u201d<\/span><\/p>\n\n\n\n

With GDP growth <\/span>projected to slow down to 1.6%<\/span><\/a> next year, and with the <\/span>very real<\/span> possibility of inflation that continues to uptick <\/span>while<\/span> the labor market continues to cool, the rare \u201cstagflation\u201d scenario may well be where the economy eventually lands\u2014if it hasn\u2019t already.<\/span><\/p>\n\n\n\n

What Would These Conditions Mean for Investors?<\/span><\/h2>\n\n\n\n

If<\/span> a no-landing economy did morph into a stagflation economy<\/span>, investors would be in for a trying time<\/span>.<\/span> The housing market typically responds to a stagflation environment with a downturn. As purchasing power lowers, so does demand, <\/span>which in turn reduces<\/span> home prices. It also dampens new construction as building costs rise while ROIs go down. <\/span><\/p>\n\n\n\n

Eventually, a housing market downturn would stifle the supply that has just begun to recover, <\/span>which would artificially push<\/span> up house prices on existing homes. <\/span>So we<\/span> could end up in another Ice Age, where housing is unaffordable and supply and activity are low.<\/span>  <\/span><\/p>\n\n\n\n

However, bear in mind that it\u2019s all relative, and economists cannot predict the precise calibration of all the factors affecting different segments of the economy. If, as Ben Bernanke believes, we\u2019re already in a stagflation-like economy, it has failed to impact the housing market. On the contrary, the real estate sector appears to be recovering, with inventory, sales, and new construction all growing. <\/span><\/p>\n\n\n\n

It\u2019s not that investors shouldn\u2019t heed warnings about the possibility of a \u201cno-landing\u201d economy or even a stagflationary economy in the longer run. It is only sensible to keep an eye on key economic metrics like employment figures and inflation rates and to <\/span>diversify<\/span><\/a> wherever possible. <\/span><\/p>\n\n\n\n

However, it\u2019s also <\/span>important<\/span> to keep these figures in perspective. <\/span>We likely would need to experience a <\/span>pretty<\/span> dramatic event\u2014another massive inflationary spike and a rate hike from the Fed or an unexpected and catastrophic labor market downturn\u2014for the housing market to <\/span>really<\/span> budge.<\/span> The aftereffects of the pandemic, when people couldn\u2019t move or buy a house even if they wanted to, will continue influencing people\u2019s behavior for a <\/span>good while longer<\/span>. Given the uniqueness of the post-pandemic era, it will take a lot more to dampen demand for housing than even technically living in a stagflation economy.<\/span><\/p>\n\n\n\n \n

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