The consensus narrative that the US economy is headed for a soft landing appears innocent, strategists at BCA Research said in a note on Wednesday.
"The US will fall into recession in late 2024 or early 2025," based on data from the bent Phillips curve framework.
According to BCA, this framework shows a non-linear relationship between inflation and unemployment. When unemployment is high, companies can hire workers without raising wages significantly.
However, when full employment is achieved, companies can only add to their workforce by attracting workers from other companies, which triggers a cycle of rising wages and prices. This wage-price spiral can only be stopped by reducing aggregate demand, usually through tighter monetary policy.
"Following the US avoiding recession in 2022 and 2023 is because the economy is operating along the steep side of the Phillips curve," the strategist reported.
"When the labor supply curve is nearly vertical, weak labor demand will primarily result in lower wage growth and decreased job opportunities. In other words, perfect disinflation," they added.
In line with its outlook, BCA is now less inclined towards equities, after expressing an optimistic view last year and neutral in early 2024.
As a result, strategists expect the S&P 500 stock market index to fall to 3,750 during the next recession.
"Such a decline will bring the index back to where it should be based on estimated future net worth of income," added BCA strategist.
