Bank of America pushes out recession call to the first half of 2023

Published Fri, Sep 9 202211:53 AM EDTUpdated Fri, Sep 9 20221:18 PM EDT

There's some good news in Bank of America's expectation that the economy is headed for recession: The contraction now looks likely to start later than expected and is still expected to be shallow by historical norms. Previously, the bank's economists had been looking for the decline to start later in 2022. But with the labor market still showing sizeable gains, consumer spending remaining robust and a sharp slide in the trade deficit, Bank of America now sees growth stronger than expected this year and no contraction until the first half of 2023. "Our 3Q US GDP tracker has been running well ahead of our official published forecast, suggesting the economy has retained more underlying momentum than we anticipated," BofA economist Michael Gapen and others said in a client note. "Taking these and other signals into account, we have revised our outlook for the US economy in favor of a prolonged expansion, more tightening from the Federal Reserve, and a later downturn in labor markets." Where the bank previously expected two consecutive quarters of negative growth to close out 2022, it now sees slightly positive gross domestic product gains instead. BofA economists forecast the Q3 and Q4 real GDP readings coming in at 1% and 0.5%, respectively, compared to prior estimates of -0.5% and -2%. The U.S. economy has already seen two consecutive negative quarters to start the year, with Q1 at -1.6% and Q2 at -0.6%. That fits a standard definition of recession itself, though many economists think the widely accepted arbiter of such matters, the National Bureau of Economic Research, won't declare the first half in recession . With the recession delayed, Gapen wrote that opens the door to the Federal Reserve to get tougher with monetary policy in its ongoing battle against inflation. Bank of America expects the Fed to enact a third consecutive 0.75 percentage point rate hike later this month, followed by additional increases that eventually take the fed funds rate up to a range of 4%-4.25%, from its current 2.25%-2.5%. "Although we project the expansion to last longer than before, we still expect tighter monetary policy to ultimately push the economy into a mild recession," Gapen wrote. "If there has been a shift in the Fed's tone in recent months, it has been in the direction of a stronger commitment to reducing inflation, even at the risk of a downturn." A recession could take the unemployment rate up to 5%, from 3.7% currently, which Gapen said would equate to "a relatively mild recession" in historical terms. Bank of America then expects inflation to moderate to 2.6% in 2023 and 2.2% in 2024, as measured by the Fed's preferred core personal consumption expenditures price index. Core PCE was 4.6% in July.