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Wells Fargo: Soft Landing More Likely Than Recession

According to strategists at Wells Fargo, the likelihood of a soft landing for the economy outweighs the risk of a recession. They attribute this outlook to several key factors that are mitigating the chances of a significant economic downturn.

In a recent note, the strategists indicated that as 2024 draws to a close, the Federal Reserve’s goal of achieving a soft landing seems increasingly attainable, reducing the risk of an imminent recession. They observed that U.S. economic activity has slowed gradually, coupled with ongoing disinflation trends and a cooling labor market. These developments led the Fed to lower interest rates on September 18 for the first time since the disruptions caused by the pandemic in 2020.

Wells Fargo is optimistic that disinflation will persist, which is expected to enhance consumer spending and real income levels. They noted that inflation has decreased earlier in this cycle compared to previous recessions, allowing more room for economic growth.

Another crucial aspect of the soft-landing scenario is the labor market. Although a rise in unemployment is anticipated, Wells Fargo highlights that hiring gaps in sectors such as healthcare will likely buffer against broader employment losses. The gradual economic slowdown may lead to increased unemployment, but this will predominantly be driven by new entrants to the workforce, rather than widespread layoffs.

The resilience of the service sector, which constitutes more than two-thirds of U.S. economic activity, serves as an additional safeguard against a severe downturn. The ongoing strength in this sector contributes to the overall positive growth outlook.

The note emphasized that service industries continue to expand, with these varying trends collectively supporting ongoing economic growth.

Additionally, financial conditions remain accommodating, benefiting credit-sensitive sectors like small businesses and real estate. Wells Fargo noted that such conditions are helping to avoid the kind of financial tightening typically seen in late-cycle scenarios, which often precede a recession.

Wells Fargo’s analysis places significant emphasis on monetary policy. They believe that the recent interest rate cuts by the Fed are well-timed and will alleviate some pressure on the economy. The report states that these moderate cuts will particularly assist lower- and middle-income households by enhancing credit quality.

While acknowledging existing uncertainties, especially with challenges in the global economy, particularly in regions such as China and Europe, Wells Fargo maintains that a recession is not on the horizon. Instead, they predict a “bumpy ride” leading into early 2025, followed by a transition into a mild growth recovery.

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