No Landing Scenario Could Raise Concerns About Overheating Economy: UBS

In a recent note, analysts at UBS warned that the U.S. economy may continue to perform better than anticipated, leading to concerns about potential overheating.

The September jobs report showcased a surprising gain of 254,000 payrolls—significantly surpassing predictions—along with a revision adding 72,000 jobs for the previous two months, indicating stronger economic performance than many expected.

UBS remarked that positive labor market data has bolstered confidence in achieving a soft landing, alleviating concerns about an impending economic downturn. After a period of negative economic trends since spring, recent economic indicators are consistently exceeding expectations. Additionally, a rise in consumer spending points to further strength in the economy.

The possibility of a “no landing” scenario was highlighted, where the economy continues to thrive without experiencing a slowdown. UBS noted that U.S. nominal GDP grew by 5% in the first half of 2024, with the potential to maintain this pace or even accelerate. While this growth rate may seem high compared to the slower growth of the 2010s, UBS suggested it could become the new norm.

However, the firm cautioned that sustained high growth might reignite inflation fears, particularly looking ahead to 2025. Currently, there are no indicators of rising inflation, but the risks remain.

Furthermore, the robust labor data has not prompted any changes in the Federal Reserve’s plans for two rate cuts of 25 basis points each by the end of 2024. UBS anticipates the Fed will stick to this strategy, although the trajectory beyond 2024 remains uncertain. If the economy continues to grow at 5%, the Fed may adopt a more cautious approach to cutting rates further.

In conclusion, while the strong economic data has been well received by investors, prolonged growth could raise worries about overheating, which may influence expectations around future rate cuts.