"The risks are growing that the stubborn Fed gradually then suddenly puts the economy in recession," he said. "But the economy may narrowly escape the dreaded recession outcome for these three reasons."

'Artificial intelligence is the real deal'

Even though AI technologies are in the early innings, Arone says they hold a lot of promise for boosting economic productivity, increasing company profits, and igniting further growth for businesses.

"Recent studies assert that AI can improve productivity across a wide range of jobs by 20% to 80%. That compares favorably to another general-purpose technology, steam power," he said.

Arone notes that steam power sparked the Industrial Revolution, and that technology increased productivity by just 18% to 22% when it was installed in factories.

If AI can improve productivity by a multiple of that, it could unlock significant economic benefits in the future — and those benefits should more than outweigh any policy mistake by the Fed, Arone said.

'Immigration delivers surprising economic benefits'

Americans can thank immigrants for the continued progress in battling inflation, according to Arone.

"Many people underappreciated the role that increasing immigration has played in stabilizing the post-pandemic labor market without further flattering inflationary pressures," he said.

Wage inflation soared during the early days of the pandemic, which stoked overall inflation to a cycle peak of 9.1% in June 2022. But the influx of more than 1.5 million immigrants in 2023 helped balance out supply and demand in the labor market, Arone said.

"The pace of immigration increases over the past couple of years is consistent with past economic expansions. And, with job openings remaining elevated in immigrant-dependent service industries, participation rates are likely to increase over the next two years, further boosting the labor market," he said.

Arone also notes that the increase in immigrants can have a compounding impact on the US economy overtime. He says while this set of workers will typically take low-skill service jobs upon their arrival in the country, some of them will become entrepreneurs and stoke innovation, consumption, and fiscal contributions.

'High-end consumers are in great shape'

For all the concerns about rising delinquency rates and more than $1 trillion in credit card debt, Arone says the high-income cohort of the US population is in strong financial shape.

He says that's important because people who earn $150,000 or more are responsible for a 40% of US consumer spending.

"They own 85% of stocks, 80% of bonds, and two-thirds of liquid assets. Yet, they only make up about one-third of consumer credit card balances," Arone said, citing data from Empirical Research Partners.

This demographic is on pace to see their wages grow 5% this year, and they are expected to increase their spending by 8% this year, which could be even higher if inflation continues to fall and stock and home prices continue to rise, Arone said.

"In a departure from past periods, higher stock and home prices combined with a significant increase in their interest income has enabled top earners to spend solidly throughout this tighter monetary policy cycle," he said.

Taken together, this suggests to Arone that the US economy is on track for solid growth in the coming quarters and will ultimately avoid a recession, and that should enable a continued rise in the stock market.

"A restrictive Fed won't stop the music this time around because the economy's moving to a new rhythm," he said.