Soft-landing, or no soft-landing, that is the question Q1 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 Q1 data.

In the first quarter, the soft-landing probability decreased from 44% to 40%. Meanwhile, the recession and stagflation probabilities increased to 27% and 28%, respectively.

The probabilities of each growth scenario saw a reversal in direction during the first quarter. While the change in the trend of probabilities is not a concern yet, it is something to be watched over the next few quarters, especially if the upticks in the stagflation and recession probabilities start to solidify.

A switch-up in Q1

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 Q1 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 first quarter, the soft-landing probability decreased from 44% to 40%. Meanwhile, both the recession and stagflation probabilities increased to 27% and 28%, respectively. 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.

The probabilities of each growth scenario saw a reversal in direction during the first quarter. The soft-landing probability fell for the first time since 2022, while both the stagflation and recession probabilities increased. While the change in the trend of probabilities is not a concern yet, it is something to be watched over the next few quarters, especially if the upticks in the stagflation and recession probabilities start to solidify.

Meantime, the probability of a monetary policy pivot occurring in the next two quarters fell further to 32% from 33% last quarter. While the declining trend in the probability is consistent with the Federal Open Market Committee's (FOMC) most recent policy decisions, a further rise in the stagflation and/or recession probabilities may increase policy uncertainty. As a result, the monetary policy pivot probability should be carefully watched in the next few quarters.

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