The path to a soft landing for the US economy is a narrow one, BCA Research said in a recent report, estimating just a 20% chance of avoiding a recession before the end of 2025.
The firm’s strategists highlight that the US unemployment rate, which tends to revert to its mean, usually starts rising after reaching very low levels.
“Thus, anyone betting on a soft landing - tantamount to betting on the unemployment rate moving sideways for an extended period - is implicitly making the case for "this time is different",” the note states.
Citing their research, BCA believes the unemployment rate is unlikely to stay low. When unemployment is very low, inflation becomes highly sensitive to changes in economic slack.
This, in turn, necessitates near-perfect calibration of monetary policy by central banks to prevent the economy from overheating or cooling down excessively, which would lead to rising unemployment, strategists noted.
Discussing whether the Fed can achieve a soft landing for the labor market, BCA pointed out that the US unemployment rate has remained below 4% for 27 consecutive months, with payrolls growing by an average of 242,000 over both the past three and six months.
This strong labor market performance is positive news. Yet, the strategists caution that abundant job openings over the past two years have provided a buffer, allowing newly unemployed workers and new entrants to quickly find employment.
“However, the jobs-workers gap - the excess of job openings over unemployed workers - has fallen by three-quarters from its peak,” strategists wrote.
“If the trend continues, there will be more unemployed workers than job openings by early 2025. At that point, the unemployment rate could start rising rapidly,” they added.