Morgan Stanley analysts remain optimistic about the US economy, even amidst signs of slowing consumption and labor market indicators that have sparked fears of a potential recession.
Despite these concerns, the firm continues to forecast a soft landing, bolstered by the expectation of lower interest rates.
The Chief US Economist at Morgan Stanley acknowledges the slowdown in the economy, noting, "GDP growth is tracking half a percentage point lower than where we pegged it in our mid-year outlook."
However, the slowdown is described as "orderly," with confidence that the Federal Reserve will act to support continued economic expansion.
This confidence is anchored in the belief that Federal Reserve Chair Jerome Powell can adeptly navigate the incoming data to avoid a recession. The firm has long predicted three rate cuts this year, beginning in September, and current market expectations align with this forecast.
Morgan Stanley said labor market conditions have indeed cooled, with payroll growth slowing to an average monthly gain of 177,000 in the second quarter, and the unemployment rate rising to 4.1%.
Additionally, they state that real consumption growth is running about 1 percentage point annualized below Morgan Stanley's initial projections for the first half of the year.
Despite these trends, the analysts believe that the slowing in consumption is exaggerated and reflects a normalization of Covid-related distortions.
Morgan Stanley added that it is closely monitoring key indicators, such as the employment-to-population ratio and job openings, for signs of a potential recession.
However, the firm notes that jobless claims have not risen significantly, and layoffs remain low. The payroll data, while showing a noticeable slowdown, still indicates strong growth. The analysts conclude that "the Beveridge curve has fully normalized" and continues to move on a path consistent with their call for a soft landing.
Overall, Morgan Stanley maintains that the US economy is likely to experience a soft landing, driven by strategic actions from the Federal Reserve and a resilient labor market.