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- Talk of a soft landing tends to precede a recession, Deutsche Bank said in a note.
- A number of indicators still signal that a recession is possible, analysts warned.
- "History suggests we're still relatively early in the lag of monetary policy."
Talk of a soft landing has been heating up recently, but history shows such trends have also preceded a recession, Deutsche Bank said in a Monday note.
Lower inflation, strong employment numbers, and signs of a Fed pivot to rate cuts this year have driven the narrative, the note said, pointing to surging mentions of "soft landing" in news Bloomberg articles. But similar surges took place before downturns in the early 1990s, early 2000s, and 2008.
"Everything points to a soft landing except history," analysts led by Jim Reid wrote, listing an array of indicators are still flashing red on the economy.
To be sure, data have given investors reason to be optimistic. US growth has been surprisingly resilient, inflation has already reached the Fed's 2% target on a six-month basis, unemployment remains below 4%, and consumers have remained strong, despite the central bank's aggressive hiking cycle.
But past cycles signal caution about becoming too assured about a soft landing.
"History suggests we're still relatively early in the lag of monetary policy. 6 cycles out of 13 rolled over between 19-28 months after the first Fed hike. That would be Oct 23 to July 24 superimposed on this cycle," the note said.
In fact, the risk of a recession is higher now than they were in 2022 or 2023, it added.
Deutsche Bank noted that Fed tightening has already pushed credit card delinquencies up to their highest in 12 years, while fueling unrealized losses on bond investments made when interest rates were low.
The bond market also continues to signal a harsher downturn ahead, as short-term yields remain above long-dated ones. Though some have waved off this signal, recessions occur several months after these rates reverse, analysts wrote.
And while the labor market has broadly demonstrated resilience, the hiring rate has been on the decline, with more people considering jobs "hard to get." A good leading indicator is the temporary help services category, which has fallen through last year.
Payroll growth has also been underperforming expectations. When measured on a state level, recessions occur when more than five states see at least seven months of a growth slowdown, as is happening now, Deutsche Bank added.
Meanwhile, markets are expecting 150 basis points worth of Fed rate cuts, a level of monetary loosening that tends to coincide with a recession.
Other red flags include the Conference Board's Leading Economic Index, which is suffering a level of decline only seen in past recessions, and the personal savings rate hitting its lowest since the 2008 crash.