BCA Predicts a US Recession as the Most Likely Outcome

BCA Research asserts that a recession in the United States is still the “most likely outcome,” despite recent changes in Federal Reserve policy.

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

The firm highlights the declining quits rate in the private sector, which has reached levels not observed since late 2016, at a time when unemployment was approximately 4.7%. BCA considers the quits rate to be a more dependable indicator of cyclical labor demand compared to job openings, noting a stronger correlation between quits and the unemployment rate than what the Beveridge curve suggests.

Additional indicators of economic stress include an increase in Americans only able to secure part-time positions and a rise in transitions from employment to unemployment. BCA points out that the recent uptick in the unemployment rate has been partially influenced by a growing labor force. Nonetheless, traditional metrics such as nonfarm payroll growth are also showing signs of slowing down.

Revisions to payroll figures from April 2023 to March 2024 reflect this deceleration, while various diffusion indexes indicate weakened payroll growth across different sectors. The US payroll momentum indicator has fallen below the boom/bust threshold, raising further alarms regarding labor demand.

While some attribute the softened unemployment data to a rising labor supply, BCA cautions that this perspective neglects underlying challenges. Preliminary payroll benchmarks may signal an impending downturn, as movements below the 50 level in these indexes could either be temporary reversals or precursors to a recession.

BCA strategists also note that tight monetary policy plays a role in the recession outlook. They argue that even with the Fed’s rate reductions, “monetary policy will remain tight for some time.”

Additionally, while AI-related investments have the potential to significantly boost aggregate demand in the US economy, BCA emphasizes that this remains a future possibility rather than a current trend. At this juncture, they express that there is “no clear basis to expect that AI-related capital expenditures will create a scenario similar to the mid-1990s, where a recession is circumvented despite tight monetary policy.”