Soft Landing More Likely Than Recession, Wells Fargo Says Investing.com

Investing.com — A soft landing is more likely than a recession, according to Wells Fargo strategists, citing a number of key factors that prevent a sharp economic downturn.

“As we enter the final quarter of 2024, we believe the Fed’s desired destination for a soft economic landing is now in sight, reducing the chances of a near-term recession,” strategists said in a Monday note.

“U.S. economic activity has gradually slowed as a window of further progress in disinflation has combined with a cooling labor market. These developments led the Fed to begin cutting interest rates on September 18, for the first time since the pandemic shock of 2020.”

Wells Fargo believes disinflation will continue, which should boost consumer spending and real incomes. They argue that inflation has “declined unusually early” in this cycle compared to previous recessions, allowing more room for growth.

Another significant factor contributing to poor landing prospects is the labor market. Despite some expected increases in unemployment, Wells Fargo notes that post-pandemic hiring gaps in sectors such as health care will likely cushion broader employment declines. The gradual slowdown in the economy will lead to an increase in unemployment, but it will be driven by new labor force entrants rather than layoffs.

The services sector, which accounts for more than two-thirds of US economic activity, remains resilient. This continued strength is another cushion against a sudden drop.

“Service industries continue to expand, and we believe these diverging trends are still linked to continued economic growth,” the note added.

Financial conditions also remained accommodative, helping credit-sensitive sectors such as small businesses and real estate. Wells Fargo points out that these conditions “prevent the kind of late-cycle financial crisis” that typically precedes a recession.

Monetary policy is central to Wells Fargo’s view. They believe the Fed’s interest rate cuts are timely and will ease pressure on the economy.

“A series of timely, more moderate interest rate cuts by the Fed will help credit quality,” benefiting low- and middle-income households in particular, the report said.

While uncertainties remain, especially as the global economy faces challenges in China and Europe, Wells Fargo concludes that a recession is not imminent. Instead, the bank predicts a “bumpy ride until early 2025 before entering a mild recovery in growth.”