Investing.com -- A soft landing is more likely than a recession, according to Wells Fargo (NYSE:WFC) strategists, citing a series of key factors that are 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 said in a Monday note.
“U.S. economic activity has gradually slowed while a window of further disinflation progress has combined with a cooling labor market. These developments prompted the Fed to begin lowering interest rates on September 18 for the first time since the pandemic shock in 2020.”
Wells Fargo believes disinflation will continue, which should boost consumer spending and real incomes. They argue that inflation "eased unusually early" this cycle compared to past recessions, allowing for more space for growth.
Another significant factor contributing to the soft-landing outlook is the labor market. Despite some 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 will result in higher unemployment but driven more by new entrants to the workforce rather than layoffs.
The service sector, accounting for over two-thirds of U.S. economic activity, remains resilient. This ongoing strength is another cushion against a sharp downturn.
“Service industries continue to expand, and we believe these divergent trends still net out to continued economic growth,” the note adds.
Financial conditions have also remained accommodative, helping credit-sensitive sectors like small businesses and real estate. Wells Fargo points out that these conditions "are preventing the sort of late-cycle financial squeeze" 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 well-timed, more moderate interest-rate cuts by the Fed will provide relief to credit quality," particularly benefiting lower- and middle-income households, the report states.
While uncertainties remain, particularly as the global economy faces challenges in China and Europe, Wells Fargo concludes that a recession is not imminent. Instead, the bank foresees a "bumpy ride into early 2025 before cruising into a mild growth recovery."