U.S. Economy Faces Hard Landing Risk as GDP Contracts 3.7%

The risk of a hard landing for the U.S. economy has intensified, with recent data indicating that the first-quarter GDP is likely to contract. The latest job market data and manufacturing PMI reports have raised concerns about the economic outlook, with job openings decreasing and manufacturing activity slowing down. The number of job openings in the U.S. fell to 7.6 million in February, down from 7.8 million in January, and the ISM manufacturing PMI index dropped to 49, below the 50 threshold that separates expansion from contraction.

Economists and analysts have pointed out that the job market is in a state of low hiring and low firing, with the number of layoffs increasing and the number of job quits decreasing. This suggests that workers are finding it harder to switch jobs for better pay, which could be a sign of a weakening labor market. The manufacturing sector is also facing challenges, with new orders and employment decreasing while prices paid by manufacturers have risen to their highest level since June 2022.

The economic uncertainty has been exacerbated by the potential impact of trade policies, with the U.S. government's trade war and the related uncertainty adding to the pressure on the labor market. The Atlanta Fed's GDPNow model has revised its forecast for the first-quarter GDP growth to -3.7%, down from -2.8% in the previous estimate. Even after excluding the impact of gold imports, the model predicts a 1.4% contraction in the first quarter, up from -0.5% previously.

The risk of a hard landing has also been reflected in the market, with the probability of a hard landing or recession increasing to 49% according to SOFR options. This has led to expectations of further rate cuts by the Federal Reserve, with traders betting on three rate cuts this year. The economic challenges facing the U.S. are not limited to domestic issues, as the potential for a hard landing could also have global implications, with foreign investors seeking to hedge against the risk of a devaluing dollar.