Soft-landing, or no soft-landing, that is the question Q3 update

Summary

In September, we wrote a five-part series of reports that introduced a new toolkit to predict the probability of soft-landing, stagflation and recessionary episodes. The toolkit also predicts the probability of a monetary policy pivot occurring in the next two quarters. In this report, we update our framework with Q3 data.

In the third quarter, the soft-landing probability increased from 40% to 42%. Meanwhile, the recession probability declined to 28% from 30%, and the stagflation probability declined to 27% from 28%. The soft-landing probability is the highest, which indicates that the chances of a soft-landing (trend-like growth) are higher during the next four quarters.

Though the growth scenario probabilities were little changed from last quarter, the aftermath of the election has created uncertainty for the economic outlook, which may create volatility for the probabilities moving forward.

Is a soft-landing still in the cards?

In September, we wrote a five-part series of reports that introduced a new toolkit to predict the probability of soft-landing, stagflation and recessionary episodes. The series details our methodology, but on a basic level, our framework effectively predicted periods of soft-landing, stagflation and recession using a threshold of 33% in the post-1950 era. It also accurately predicted episodes of policy pivots in the post-1990 era using a threshold of 35%. In this report, we update our framework with Q3 data to predict the probabilities of the three scenarios occurring during the next four quarters. We also predict the probability of a monetary policy pivot occurring in the next two quarters.

In the third quarter, the soft-landing probability increased from 40% to 42%. Meanwhile, the recession probability declined to 28% from 30%, and the stagflation probability declined to 27% from 28%. The soft-landing probability is the highest, which indicates that the chances of a soft-landing (trend-like growth) are higher during the next four quarters. However, elevated probabilities for all three scenarios should caution analysts to consider more than one scenario occurring. Additionally, new policies administered by the newly-elected Trump administration may affect the probabilities of each growth scenario in the near future.

While the probabilities of each growth scenario were little changed from last quarter, the probability of a monetary policy pivot occurring in the next two quarters saw a bit more movement, dropping to 37% in Q3 from 43% in Q2. Though still above the threshold of 35%, the declining trend in the probability is consistent with the Fed's most recent policy decisions. The Fed kicked off its easing cycle at its September meeting with a 50 bps cut, and it continued to ease at its November meeting with a 25 bps cut. Historically, once the FOMC adopts a policy stance, it keeps it for at least several meetings. We therefore expect the probability of a monetary policy pivot in the next two quarters to remain depressed, which is consistent with our framework.

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