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

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 Q4 data.
• In the fourth quarter, the soft-landing probability increased from 42% to 44%. Meanwhile, the recession probability declined to 26% from 28%, and the stagflation probability remained constant at 27%.
• Though the growth scenario probabilities were little changed from last quarter, uncertainty surrounding economic policy may create volatility for the probabilities moving forward.

Watching and waiting

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 Q4 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 fourth quarter, the soft-landing probability increased from 42% to 44%. Meanwhile, the recession probability declined to 26% from 28%, and the stagflation probability remained constant at 27%. 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.

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