Economists at Bank of America (BofA) have taken a bold stance by retracting their prediction of an upcoming recession. This move makes them the first major bank to abandon their recession forecast, and it may not be long before others follow suit.
In a recent research note, BofA’s Michael Gapen and his team revealed that they now anticipate a “soft landing” for the economy instead of an impending recession, which they had initially projected for the first half of next year. Essentially, they expect economic growth to slow down rather than decline.
This change in perspective aligns with last week’s announcement from the Federal Reserve, whose staff no longer anticipates a recession. There are valid reasons for this newfound optimism. Despite the Fed’s significant interest rate hikes totaling 5.25 percentage points since March 2022, gross domestic product (GDP) defied expectations and rose by 2.4% on an annual basis in the second quarter. Furthermore, inflation has decreased from 9% in June of the previous year to a more recent 3%, fueling hope that the central bank’s efforts to curb price growth may soon come to an end.
Job growth remains robust, with the unemployment rate steadfastly low at 3.6%. Economists predict that this rate will remain unchanged when July’s data is released later this week.
BofA’s revised outlook now anticipates a yearly GDP growth rate of 2% for this year, a slight increase from their initial 1.5% prediction.
However, other economists at major banks maintain a more cautious stance and continue to view a recession as their base case. While Morgan Stanley has consistently called for a soft landing, Deutsche Bank predicts a mild recession may occur later this year, toward its end. Wells Fargo economists go further by predicting a recession in the first half of next year, while Citigroup envisions a recession starting in the U.S. during the first quarter of next year.
There are legitimate reasons for exercising caution. A recent Fed survey indicates that during the second quarter, banks tightened lending terms to the greatest extent since the early days of the pandemic. This tightening could potentially hinder economic growth by making borrowing harder or more expensive.
In conclusion, Bank of America’s economists have diverged from the pack by modifying their recession forecast. While their newfound optimism should be taken into account, caution is warranted given the varying outlooks from other major banks and the potential economic impact of tightened lending terms.
The Potential Impact of Staff Competition and Travel Demand on Inflation and the Economy
As employers face fierce competition for staff and travel demand remains strong, the risk of inflation in the services sector looms large. This situation presents a dilemma for the Federal Reserve, which may feel compelled to continue raising interest rates. However, such a course of action could potentially lead to a downturn once the full impact of the rate hikes already implemented is realized.
While some economists remain cautious, there are indications that a soft-landing scenario is becoming increasingly plausible. Wells Fargo’s chief economist, Jay Bryson, admits that his confidence in predicting a recession has diminished. Although he still believes a recession is more likely than not, he now assigns a 60% probability to this outcome, down from 70% three months ago.
According to Bryson, the key factor in determining whether his team joins the soft-landing camp will be the moderation of inflation. Any signs of slower wage growth could also influence their outlook.
Brett Ryan of Deutsche Bank echos these sentiments, stating that the probability of a soft landing is undoubtedly increasing. He emphasizes that the next few months of economic data will be pivotal in shaping his perspective. Deutsche Bank’s recession-probability model, which predicts a significant downturn within the next year, has seen a slight decrease and now hovers around a 90% level.
Nathan Sheets of Citigroup shares similar concerns about inflation in the services sector but acknowledges that the likelihood of soft-landing scenarios has risen.
CEOs at S&P500 companies have exhibited a more optimistic outlook for the economy. Chief executives at PNC Financial Services Group, KeyCorp, and Fifth Third Bancorp, among others, predict a soft-landing scenario.
The stock market, too, reflects this optimism. The S&P 500 has experienced an 18% increase this year, reaching 4515.25 points as of Wednesday afternoon. Citigroup and Piper Sandler strategists have adjusted their expectations accordingly, now projecting the index to reach 5000 by the middle of next year, compared to their previous target of 4400. Even known skeptic and Morgan Stanley strategist, Mike Wilson, has displayed a more positive outlook.
In conclusion, the competition for staff and strong travel demand present inflationary risks in the services sector. While some economists are still cautious, there are indications that a soft landing is becoming more probable. The moderation of inflation and wage growth will play crucial roles in shaping their perspectives. CEOs and strategists alike express optimism about the economy, as seen in both their predictions and the performance of the stock market.