This Is Not a Soft Landing

Apollo Chief Economist

There is an ongoing debate about how core PCE inflation could come down from 5.5% to 3.2% without a slowdown in the economy, but this debate ignores that the cyclical components of GDP, including housing, have slowed sharply as a result of Fed hikes, and the non-cyclical components have continued to see strong growth in particular with strong post-Covid tailwinds to restaurants, hotels, and airlines.

The cyclical components of GDP are the interest rate-sensitive components such as housing, capex, and durable goods, and these parts of the economy slowed significantly when the Fed started raising rates, see chart below.

Put differently, it is misleading to say that Fed hikes have not had any negative impact on the economy. Fed hikes had a very negative effect on the interest rate-sensitive parts of the economy, most notably housing, and the result was a decline in housing inflation. With housing having a 40% weight in the CPI basket, the result was a decline in headline and core inflation for both CPI and PCE.

So why did the economy not slow down more, and why did Fed hikes not result in a rise in unemployment? There are two reasons.

First, the post-Covid economy saw surprising strength in the non-cyclical components of the economy, such as eating at restaurants, staying at hotels, and flying on airplanes, etc. Consumers wanted to travel, go to concerts and sporting events after Covid, and this has kept consumer spending strong.

Second, financial conditions eased significantly following SVB, and this boosted GDP growth to 4.9% in the third quarter of 2023. Similarly, the rally in the stock market, credit markets, and Treasury markets since October and after the Fed pivot in December have also eased financial conditions significantly, likely boosting the cyclical components of GDP over the coming months.

As the chart below shows, the bottom line is that the non-cyclical components continue to grow steadily because of post-Covid strong demand for consumer services, and the cyclical components are rebounding because of easier financial conditions.

The likely scenario is that the economy will reaccelerate over the coming months, which will put renewed upward pressure on inflation and, hence, bring back a more hawkish Fed.

In short, the Fed is not done fighting inflation, and, as a result, it is too early to argue that this is a soft landing because both the cyclical and non-cyclical components of GDP are likely to be solid over the coming months, see again the chart below.

Cyclical components of GDP rebounding because of easier financial conditions
Source: BEA, Haver Analytics, Apollo Chief Economist. Note: Cyclical components include interest-sensitive components, i.e., durable goods consumption, nonresidential structures, equipment investment, and residential investment. Non-cyclical components include non-durable goods consumption, services consumption, and nonresidential investment in intellectual property products.

Download hi-res chart(s)

This presentation may not be distributed, transmitted or otherwise communicated to others in whole or in part without the express consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).  

Apollo makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made during this presentation, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of the speaker as of the date indicated. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Apollo does not have any responsibility to update this presentation to account for such changes. There can be no assurance that any trends discussed during this presentation will continue.   

Statements made throughout this presentation are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed during this presentation, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients. This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by Apollo. 

Certain statements made throughout this presentation may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.