John Deere economist: High interest rates likely to persist, but economy should see ‘soft landing,’ not recession

As Kanlaya Barr sees it, analyzing the current and future prospects for the economy, both domestically and internationally, is often a matter of perspective – and that perspective is often skewed. As Ms. Barr, director of corporate economics at John Deere, opened her keynote address July 10 to about 300 attendees at the Corridor Business Journal’s annual Mid-Year Economic Review at the DoubleTree by Hilton Hotel and Convention Center in downtown Cedar Rapids, she noted her excitement at reading the most recent jobs report, which showed the nation’s economy adding 206,000 jobs in June. “I saw the number and I read two different news headlines,” she said. “One said that number was a great number. The other one said we are heading down to a recession, which is quite confusing.” That dichotomy extends to people’s views on the economy as a whole, she said. “If you ask folks who have money in their bank account, maybe they hold some crypto, they own their own homes or a second home – they feel pretty good, and the macro data is looking pretty good,” she said. “But if you ask folks who are living paycheck to paycheck, drive into McDonald's and pay $40 for a family of four, they're not feeling so good. So people are bifurcated, looking at the same thing, but from a different perspective.” Still, as she did at the CBJ's 2023 Mid-Year Economic Review, Ms. Barr offered some overarching perspectives on economic trends, both current and future. First, she indicated that the Federal Reserve’s interest rate – the target rate at which commercial banks borrow and lend their extra reserves to one another – is likely to remain elevated, as it has been in recent years, despite indications that the first rate cut in years may be forthcoming. Despite a drop in inflation for goods and energy, she said, “inflation (overall) is still pretty persistent,” particularly in the service sector, with higher wages and property rents. But even with that high inflation, the economy as a whole has not entered a recession, she said, because unlike past economies that relied heavily on manufacturing, today’s service-focused economy is “not as sensitive to the interest rate.” She also noted that when “baby boomers” see rising inflation and interest rates, they tend to moderate their spending habits. Other factors, she said, include government bailout programs such as the American Rescue Plan Act (ARPA), the Inflation Reduction Act (IRA) and proposed student loan forgiveness programs that have helped forestall recessionary trends, and an easing of the labor market crisis that has plagued many employers in recent years. “All of those policies are working to bring strategic sectors (of) industry back to the U.S. , and it’s kind of working against what the Fed is trying to do,” she said. “You have one hand trying to slow down the economy, (then) you have the government trying to bring back all the activities from abroad. So all of these are the factors that just make this cycle longer than what we expected originally.” As Ms. Barr had mentioned previously, the growth in new jobs has slowed substantially. “We have seen the number of jobs per seeker actually decline quite a bit from its peak,” she said. “At the peak in 2022, there were almost two jobs for everyone looking for a job. Today, 1.2 jobs for every job seeker. That is back to the pre-pandemic level. And people just don't quit as much anymore. I know you might still think you have to find people, but it’s just a lot better than what you were experiencing a couple of years ago.” Similar trends are being reflected in wages, with typical increases of 6-8% to guarantee worker retention now dropping to around 4% on average. “The job market has been showing signs of slowing down,” she said, “and I think it's going to continue to slow down as we move into the next 12 to 18 months.” Currently, market analysts are assuming that a Fed rate cut is on its way, perhaps as soon as September, Ms. Barr said, with another possible cut early in 2025 – but she said “it is not going back to the 0% we have seen.” Still, based on job numbers and slowing inflation, she said the economy is “more likely to experience a soft landing as opposed to a recession. That’s our forecast right now.” Ms. Barr said she expects the housing market to remain subdued, with near-record housing costs – a nationwide average of nearly $400,000, compared to just $320,000 before the COVID-19 pandemic – and a construction market unable to meet demand for moderately-priced housing stock. Other factors that will likely impact economic trends moving forward, according to Ms. Barr:

• A decline in foreign ownership of U.S. debt, with a higher percentage of U.S. investors “giving us some comfort that there’s demand out there” for U.S. treasury notes.
• Continued moderation of the farm economy, driven by continued high domestic crop yields leading to lower commodity prices. Recent drought conditions have been improving, she said, and “we are probably going to have a record year for corn and soybean yield, and when we have more than we’ve had the past couple of years, that’s probably going to keep the price lower.” And even though some input costs have declined, she said, “when you look at production costs, the operating margin for our farmers for key crops is actually looking to be lower again this year.”

Several other factors could impact the overall economy moving forward, Ms. Barr, including geopolitical forces both inside and outside the U.S. “This is the year we're going to go into the fall for the election,” she said. “But we're not alone. Half of the world’s population is going to vote at some point. So this is a big voting year as we start to see some of those results coming in. And the world slowly seems to be shifting from some of the countries, from left into right lanes. But the one thing we can say for certain is that protectionism and fragmentation is not going anywhere.” As a result of that fragmentation, Ms. Barr said, she expects to see five trends in upcoming years – increasing U.S. and European tariffs on goods from China, which will lead to excess Chinese manufacturing capacity; the growth of artificial intelligence (AI), which Ms. Barr believes will actually augment the workforce and provide more job opportunities for younger members of the workforce to increase productivity overall; persistent elevated interest rates, propelled by inflation that won’t return to the pre-COVID rates of 2%; the continued impact of the Infrastructure Investment and Jobs Act, with allocated funds being spent at increasing levels; and the growth of decarbonization and the “green economy.”