Economists at Bank of America Corp. revoked their forecast for a recession in the US, becoming the first large Wall Street bank to officially reverse its call amid growing optimism about the economic outlook.
The change comes just a week after Federal Reserve Chair Jerome Powell told reporters that the central bank’s own economists are no longer forecasting a recession.
“Recent incoming data has made us reassess our prior view that a mild recession in 2024 is the most likely outcome for the US economy,” BofA economists, led by Michael Gapen, wrote in a note to clients on Wednesday.
“Growth in economic activity over the past three quarters has averaged 2.3%, the unemployment rate has remained near all-time lows, and wage and price pressures are moving in the right direction, albeit gradually,” they wrote.
The resilience of the US economy this year, despite the most aggressive Fed tightening cycle in decades, has forced many on Wall Street to repeatedly revise their forecasts for when the country will fall into recession. Now, with recent data showing persistent strength in hiring alongside moderating inflation, forecasters are beginning to rethink their recession calls altogether.
Read More: US Recession Becomes Closer Call as Economists Rethink Forecasts
In addition to upward revisions to their forecasts for US GDP growth in 2023 and 2024, the BofA economists altered their expectations for when and how the Fed cuts rates. The bank’s economists now see them beginning later — June 2024 — and proceeding at a slower pace.
Changing Tune
While a few economists, including those at Morgan Stanley and Goldman Sachs Group Inc., have maintained throughout the past year that the US would skirt a recession despite the rapid run-up in interest rates, most banks have taken the other side.
Still, Deutsche Bank AG’s Peter Hooper and Matthew Luzzetti say the line between a mild recession and a soft landing is “increasingly fine,” a sentiment increasingly echoed by others in the recession camp. A recent survey of business economists showed a strong majority now say the odds of the US entering a recession in the next 12 months are 50% or less.
In a recent speech, Cleveland Fed President Loretta Mester nodded to the change in tune among businesses in her region. At the end of 2022, “many of our business contacts were telling us they expected the economy to enter a recession this year,” Mester said. “Now, most think there won’t be a recession this year.”
The backbone of the economy and its resilience is the labor market. Low unemployment, steady hiring and solid wage growth have given American households the wherewithal to keep spending. Legislation championed by the Biden administration is also giving an unexpected boost to economic growth, a trend that could add to reasons why a US recession may be delayed or even averted.
But the US is not out of the woods yet. Many economists say the cumulative impact of monetary tightening has yet to be felt, and while inflation has eased, continued resilience in the labor market and consumer spending could slow inflation’s descent, leading to more Fed tightening.
Fitch Ratings also downgraded the US’s sovereign credit grade on Tuesday, with the agency arguing the country’s finances will likely deteriorate over the next three years given tax cuts, new spending initiatives, economic shocks and repeated political gridlock.
Read more: Fitch’s US Credit Downgrade Sparks Criticism Along With Unease
What About the Others?
Many other Wall Street economists with standing recession forecasts aren’t ready to pivot just yet.
Bloomberg Economics forecasts a US recession will begin either in the fourth quarter or at the start of 2024. To drop that call, chief US economist Anna Wong says she would need to see:
- Widespread credit availability and a stabilization in delinquencies and rejection rates for people applying for credit cards and auto loans
- New federal initiatives that delay student loan forbearance or reinstate forgiveness
- Clearer signs of private sector take-up of “Bidenomics” programs, or a surge in spending related to the infrastructure bill, the Inflation Reduction Act and the CHIPS Act
Wells Fargo & Co.’s Jay Bryson said he’d need to see “continued disinflation in the months ahead,” something that would help support real income growth, in order to scrap the bank’s recession call.
Thomas Simons at Jefferies has a longer list, including “several more months of data that show slowing wage growth, slowing inflation, a significant improvement in productivity” and a pickup in consumer spending.
For Barclays Plc to change their forecast from mild recession to no recession, chief US economist Marc Giannoni said they would require a sustained decline in core inflation, a rebalancing of the labor market and a gradual moderation in aggregate demand.
Yelena Shulyatyeva at BNP Paribas, on the other hand, said she’d need to see a re-acceleration in payroll growth to be convinced the US could avoid a downturn.
--With assistance from Malcolm Scott.
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