US Recession Still Likely Despite Fed Rate Cuts, BCA Research Warns
BCA Research maintains that a US recession remains the “most likely outcome,” despite recent policy shifts by the Federal Reserve. Although the Fed's recent rate cuts have modestly increased the possibility of a soft landing, strategists at BCA continue to forecast a downturn for the economy, driven primarily by weakening labor market conditions. BCA points to the declining private sector quits rate, which has fallen to levels not seen since late 2016, when unemployment was around 4.7%. The firm views the quits rate as a more reliable indicator of cyclical labor demand than job openings. Other signs of stress include a rise in Americans only able to find part-time work and an increase in transitions from employment to unemployment. BCA also notes that the recent increase in the unemployment rate has been partly driven by new entrants to the labor force. Still, even traditional indicators like nonfarm payroll growth are showing signs of deceleration. Payroll revisions from April 2023 to March 2024 indicate a slowdown, while diffusion indexes show that payroll growth has weakened across multiple industries. The US payroll momentum indicator has dipped below the boom/bust line, adding to concerns over labor demand. While some argue that the rising labor supply explains the softer unemployment data, BCA warns that this narrative overlooks deeper issues. Preliminary payroll benchmarks signal a potential downturn ahead. Tight monetary policy also contributes to the recession outlook, according to BCA strategists. Even after the Fed's rate cuts, they argue that "monetary policy will remain tight for some time." Strategists point out that while AI-related investments could potentially provide a significant boost to aggregate demand in the US economy, this remains a projection rather than a current reality. BCA cautions that there is "no clear basis to expect that AI-related CAPEX will produce a mid-1990s-like outcome where recession is avoided despite tight monetary policy."
Analysis: BCA Research warns that a US recession is still likely despite recent Fed rate cuts. Their focus on labor market conditions and indicators like the quits rate and nonfarm payroll growth suggest a weakening economy. Tight monetary policy and potential AI-related investments are also factors to consider. Investors should pay attention to these warning signs and adjust their strategies accordingly to mitigate potential risks in the market.
