Russell Investments: US economy can dodge a recession in the year ahead

Russell Investments: US economy can dodge a recession in the year ahead

June 26, 2024

Outlook
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Markets are underappreciating the risk of a mild US recession. European stocks are attractively valued relative to US stocks.

‘Markets at mid-year 2024 are priced for a no-recession soft-landing scenario in the US, but mixed data signals are delaying rate cuts from most central banks,’ Russell Investments looks ahead. ‘We believe this creates some risk of a harder landing – likely in the form of a mild recession – in late 2024/early 2025.’

‘The key question of the year has been whether the US economy is headed toward a soft-landing, hard-landing, or no-landing scenario – and a clear answer has yet to emerge. As 2024 reaches the halfway point, we see plausible reasons why any of these scenarios could occur. The reacceleration or no-landing case is supported by above-trend jobs growth, double-digit expectations for corporate earnings growth, and inflation that remains  stuck above 2.5%. The soft landing – or below-trend growth – scenario is backed by a slowdown in forward-looking labour market indicators. These include weaker hiring  rates, cooling wage growth, and rising default rates on credit cards and auto loans.

The case for a hard landing or recession relies on historical precedent. The Fed’s rate-tightening campaign has been the most aggressive since former Fed Chairman Paul Volcker’s tenure in the early 1980s, with rates currently sitting at their highest level in 23 years. The US economy has never previously avoided a recession after a sustained period of restrictive monetary policy.

A no-landing scenario seems the least likely outcome, with plenty of evidence that the US economy is slowing and inflation pressures are easing. In our view, the main debate is between a soft landing or a recession.

The argument for a soft landing is that this cycle is so different that the normal rules do not apply. However, we think this could also be a case of this time is longer rather than this time is different, with the typical economic impacts caused by rising rates manifesting at a slower pace than normal, but still eventually sparking a recession.

While both scenarios look possible to us, we believe markets are underappreciating the risk of a mild recession, creating an asymmetry in the return outlook. From our vantage point, there is some return upside if soft-landing expectations are correct, but also the risk of a potentially significant drawdown if a recession does occur. We think it’s more likely than not that the US economy can dodge a recession in the year ahead, but macroeconomic uncertainty is high.

The outlook for the eurozone economies continues to brighten as industrial activity picks up, bank lending growth improves, and inflation tracks toward the ECB’s comfort zone. We see European stocks as attractively valued relative to US stocks.’

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