Worse to Come: Bank of America Expects Unemployment to Soar to 5.6% Next Year

TOPSHOT - US President Joe Biden gives a thumb's up as he boards Air Force One at John F. Kennedy International Airport on September 22, 2022, as he returns to Washington, DC. (Photo by MANDEL NGAN / AFP) (Photo by MANDEL NGAN/AFP via Getty Images)
Photo by MANDEL NGAN/AFP via Getty Images

Unemployment will soar to 5.6 percent by the end of next year, according to a revised forecast from Bank of America.

The bank raised its forecast for unemployment after the Federal Reserve officials indicated that they think the central bank’s interest rate target will approach five percent next year. The steeper path and higher peak for interest rates makes a “hard(er) landing” more likely, according to a research note from the U.S. economics team led by Michael Gapen.

The bank had been forecasting a five percent unemployment rate for year-end 2023, so the new rate is nearly a 12 percent increase.

In August, the unemployment rate was 3.7 percent, up slightly from the 3.5 percent in July and the 3.6 percent in each of the months before that since March.

“The Fed’s actions suggest to us that it is committed to reducing inflation and it appears willing to accept some deterioration in labor market conditions,” the Bank of America economists wrote.

The bank expects GDP to fall to one percent in the four quarters of 2023. The bank thinks the Fed will raise its target range for the Federal Funds rate to 4.75 to 5.0 percent.

A rapid rise in unemployment—such as the nearly two hundred basis point hike forecast by Bank of America—is often considered a marker of a recession. The Sahm Rule, named for economist Claudia Sahm, says a recession has begun when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months. If Bank of America’s forecast is correct, the U.S. will be in a Sahm Rule recession sometime next year.

 

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