Economic Risks that Could Derail a Soft Landing

Back in 2022, there were concerns we might be heading into a recession. Inflation was high and the Federal Reserve had started to raise interest rates aggressively. Analysts feared if the rate hikes were too aggressive then it would trigger a recession. Should the Federal Reserve hike rates accordingly, we could see a soft landing.

It's now late 2023 and analysts believe we might have a soft landing. While the rate hikes in 2022 were aggressive, they were tapered come 2023. However; there is still a risk that the soft landing could be derailed due to a number of factors at work.

It helps to know what those factors are and how they could derail a soft landing. 

Risks to the Market 

Federal Reserve - Currently the Federal Reserve has signaled that they are slowing down in regards to raising interest rates. This has put investors' minds at ease as they can now plan accordingly when it comes to purchasing property. There is still the risk that they could botch the anticipated soft landing in two ways.

The first is continuing to raise interest rates or going back to raising them at an aggressive level. The second is keeping the interest rates high for a long period of time. 

Significant Pullback in Consumption - Retail sales have started to cool down while the savings accumulated during the pandemic have started to taper for many. At the same time, student loan repayments have restarted. There is a concern that the rollback of consumer spending could disrupt the market going into 2024. 

Interest Rates - When it comes to repaying debt, the current interest rates are going to be harder to pay off. Having to pay that debt plus interest will deprive companies of funds that could be invested in growth. Companies with significant leverage are going to be the most at risk in the coming months and years. 

Banking and Financial System - Stability and confidence have been restored following several major bank failures early this year. However, there are concerns regarding firms that could have a collection problem. 

Extraneous Events - These are events that will be outside the control of the consumer and financial system. Instability conflict in a region of the world, a global recession, or a government shutdown could have economic ramifications.

What it Means for Investors?

The big takeaway is while the market is heading towards a soft landing, there is no guarantee. There are other factors at work and all one could do is be prepared. This is not to say avoid investing, one should always stay active without being put in a vulnerable position. 

The Azucena Take provides an inside look into the investment real estate market using the research done by Marcus & Millichap.