Soft Landing Outlook According to Wells Fargo

Investing.com — A soft landing is deemed more likely than a recession by Wells Fargo strategists, citing key factors preventing a sharp economic downturn.

“As we enter the final quarter of 2024, we believe the Fed’s desired destination of an economic soft landing is now in sight, decreasing the odds of a near-term recession,” strategists noted in a Monday report.

U.S. economic activity has gradually slowed, while further disinflation progress and a cooling labor market have led the Fed to lower interest rates on September 18 for the first time since the pandemic shock in 2020.

Wells Fargo asserts that disinflation will continue, potentially boosting consumer spending and real incomes. They argue inflation eased unusually early this cycle compared to past recessions, allowing more room for growth.

Another significant factor contributing to the soft-landing outlook is the labor market. Despite expected increases in unemployment, Wells Fargo notes that post-pandemic hiring gaps in sectors like healthcare will likely cushion broader employment declines. The gradual economic slowdown is expected to lead to higher unemployment, driven more by new workforce entrants than layoffs.

The service sector, which accounts for over two-thirds of U.S. economic activity, remains resilient. This ongoing strength serves as another buffer against a sharp downturn.

“Service industries continue to expand, and we believe these divergent trends will continue to net out to economic growth,” the report adds.

Financial conditions have remained accommodating, benefiting credit-sensitive sectors like small businesses and real estate. Wells Fargo highlights that these conditions “are preventing the late-cycle financial squeeze” that often precedes a recession.

Monetary policy is central to Wells Fargo’s perspective. They believe the Fed’s timely interest rate cuts will ease economic pressure.

“A series of well-timed, moderate interest-rate cuts by the Fed will provide relief to credit quality,” particularly aiding lower- and middle-income households, the report states.

Despite remaining uncertainties, particularly due to global economic challenges in China and Europe, Wells Fargo concludes that a recession is not imminent. Instead, the bank anticipates a “bumpy ride into early 2025 before cruising into mild growth recovery.”