Market Analysis

BCA Research asserts that a U.S. recession is still the “most likely outcome” despite recent policy changes by the Federal Reserve.

While the Fed's recent interest rate cuts have slightly increased the chances of a soft landing, BCA strategists maintain their forecast for an economic downturn, primarily due to deteriorating labor market conditions.

The report highlights a decline in the private sector quits rate, which has dropped to levels not seen since late 2016, when unemployment stood at about 4.7%. BCA considers the quits rate a more dependable gauge of cyclical labor demand than job openings, citing a stronger correlation between quits and the unemployment rate compared to what the Beveridge curve suggests.

Other indicators of stress include a rise in the number of Americans finding only part-time work and an increase in transitions from employment to unemployment.

BCA points out that the recent uptick in the unemployment rate has been partly influenced by new entrants into the labor force. However, even conventional metrics such as nonfarm payroll growth are showing signs of a slowdown.

Specifically, revisions to payroll data from April 2023 to March 2024 indicate a deceleration, and diffusion indexes reveal weakening payroll growth across various sectors. Additionally, the U.S. payroll momentum indicator has fallen below the boom/bust threshold, further heightening concerns about labor demand.

While some suggest that the increasing labor supply accounts for the softer unemployment figures, BCA warns that this perspective ignores more profound issues. Preliminary payroll benchmarks signal a possible downturn, as shifts below the 50 level in these indexes typically either rebound quickly or indicate an impending recession.

BCA strategists also highlight that tight monetary policy contributes to the recession outlook. They argue that even after the Fed's rate cuts, "monetary policy will remain tight for some time." Moreover, while investments in AI could potentially enhance aggregate demand in the U.S. economy, BCA stresses that this remains a speculative projection rather than an immediate reality.

At this juncture, BCA cautions that there is “no clear basis to expect that AI-related capital expenditures will yield a mid-1990s-like outcome, where recession is averted despite stringent monetary policy.”

Paraphrasing text from "Reuters" all rights reserved by the original author.