Bank of America has downgraded its expectations for the economy this year to include a “mild recession.”
The bank said in a note on Wednesday that it forecasts “a mild recession in the US economy this year” and excepts the economy to shrink 1.4 percent compared with the end of last year. It sees growth returning next year but barely so. It forecasts just one percent growth in 2023.
“A number of forces have coincided to slow economic momentum more rapidly than we previously expected,” said a team of Bank of America analysts led by Michael Gapen.
The bank singled out as “most worrisome” the trend in services spending, where “revisions to prior data and incoming data, including from our BAC aggregated credit and debit card data, point to less momentum than we had been assuming.”
Inflation is also playing a role in reducing consumer spending. By driving up the prices of necessities like gasoline, housing costs, and food, it is sapping spending in other areas of the economy.
“We think at least some of the decline in momentum in consumer spending is due to the ‘inflation tax,'” the note said. “With much of the recent rise in inflation coming from food and energy prices, commodities that face relatively inelastic demand in the short run, households may have less available for discretionary purchases.”
Tighter financial conditions, especially higher mortgage rates, combined with high home prices, are slowing home sales and building, creating an economic drag.
Bank of America noted that the “Fed has become more committed to using its tools to help restore price stability and a willingness to accept at least some pain in labor markets in the process.”
“Our revised outlook suggests the Fed will indeed have to accept more pain than it wants, but should our outlook prove accurate, we think it’s a price most FOMC participants would be willing to pain,” the bank said.
The bank said it expects unemployment will rise from the current 3.6 percent to 4.6 percent.
There is one silver lining to the bank’s more pessimistic stance. The outlook now forecasts that inflation will come down somewhat faster than before, leaving inflation in line with the Fed’s two percent mandate by the end of 2024. That could allow the Fed to move to a less restrictive stance for monetary policy earlier than previously.
The bank had thought earlier that a continued expansion was most likely. Now it views a mild downturn as necessary to tame inflation and therefore more likely than not.
“To be clear, we are not thinking a deep recession is needed in order to put inflation on a path to 2% over time. Instead, we think the combination of a modest downturn plus some further diminution of pandemic-induced supply chain constraints will be enough to put aggregate supply and demand into better balance,” the bank said.
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