Soft Landing? Five Risks Could Derail It

During the fall of 2022 and into 2023, many economists were convinced that the U.S. was headed toward a recession. The question was timing, length and severity. But fast-forwarding about a year, the philosophy seems to be that we aren’t necessarily headed for a recession, at least not this year.

“Most economists are now saying that a soft landing is likely,” said John Chang, senior vice president national director, research and advisory services with Marcus & Millichap. In the recently released Marcus & Millichap video “5 Potential Risks that Could Derail a Soft Landing,” Chang pointed out that Goldman Sachs cut its recession probability within the next 12 months to 15%. “It has even been suggested that a soft landing is now the Fed’s baseline scenario,” Chang said.

But he’s not ready to say we’re out of the woods just yet. These five risks could move the economy from a soft landing to a potential slump:

1. The Federal Reserve

“They could still raise rates too much, or they could hold them too high, for too long,” Chang said. At the previous Federal Market Open Committee meeting in September, 12 of the 19 voting members believed one more rate hike could be needed next year. “That doesn’t mean they’ll still think that way when they make their next rate decision on November 1,” Chang said. “But it is a risk.

2. Decline in Retail Sales

Consumer spending has been keeping the economy going. But there are signs that retail sales growth is beginning to flatten. “The excess savings built up during the pandemic that has been fueling a lot of the spending will likely burn off by the end of the year,” Chang pointed out. Furthermore, with student loan repayments starting, discretionary spending by about 44 million people will likely decline.

3. Higher Interest Rates

It isn’t just commercial real estate owners and investors who are feeling the brunt of the higher cost of capital. Chang explained that businesses and consumers also feel the pinch as debt becomes due. “This could become a problem for some companies, especially the ones with significant leverage,” he added. When debt is rolled over at a higher interest rate, less money is available for other investments, like hiring more people.

4. The Banking and Financial System

While things seem more stable than during spring 2023, Chang said their balance sheets could be impacted as debts become due. This isn’t just CRE debts – business and consumer loans could also have an impact. “If even one significant bank runs into collection problems or debt maturity problems, we could see another bank run,” Chang commented.

5. Other Extraneous Events

Chang called these “things that could drive a shock through the economy,” like a government shutdown, surging oil prices, significant union strikes or a global recession. “Although it doesn’t look like a major issue is imminent, we need to be vigilant,” Chang said.

Even with the five factors, Chang was adamant in saying that the remainder of 2023 “looks solid,” with the potential of total annual growth in the 2% range. He added that if the economists’ consensus of 1% growth in 2024 should happen, it “could be a very solid year for commercial real estate,” he added.