Bank of America says it sees a 1 in 3 chance of a US recession sometime next year, but it will be slight

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  • Bank of America sees a 1 in 3 chance of a US recession next year, but sees a “bad landing” as more likely.
  • If the United States slips into a recession, it will be mild by historical standards, the bank’s economists said.
  • They expect the Federal Reserve to raise interest rates 30 basis points higher than what the market is pricing in.
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Bank of America warned that the US faces a one-in-three chance of slipping into a recession next year, but said it would likely be mild by historical standards.

The bank’s economists said the risks of a recession are low this year and see a “hard landing” rather than an outright recession as the Federal Reserve tightens financial conditions.

But they are increasingly concerned about the prospects for the US economy in 2023, as inflation shows signs of persistence and the labor market appears to be seriously overheating.

The US has inflation at 40-year highs, and the Federal Reserve plans a series of interest rate hikes to combat it. But there are concerns that the central bank could push the economy into a recession by raising rates too aggressively.

“Risks are low this year as the economy has a lot of momentum and it will take time for Fed hikes to impact growth,” BofA economists said in a note on Friday.

“However, next year the Fed will be faced with some tough decisions. We see a roughly one in three chance that a recession will start sometime next year.”

In May, the central bank raised interest rates by 50 basis points, the biggest rise at a meeting in 22 years, signaling similar hikes would follow.

As the Federal Reserve raises interest rates to 3.4% by May of next year, there will be a continued slowdown in the economy, according to BofA. They see growth falling to 0.4% by the last quarter of 2023.

“We expect the Fed to hike about 30 bps higher than what is priced into the market, adding a bit more pressure on financial markets,” the bank said.

“The lag from financial tightening to weaker growth is likely to be slightly longer than normal, putting gradual downward pressure on growth,” they added.

The US stock market has posted a series of weekly losses as investors worry about the risk of stagflation and recession. Sentiment has fallen to “extreme fear” levels, according to CNN’s Fear and Greed index, as business leaders from Tesla CEO Elon Musk to Goldman Sachs CEO David Solomon sound the alarm. about growth.

Market historian Jeremy Grantham has predicted that stocks could fall as much as 80% from their peaks in a next recession, although JPMorgan quant guru Marko Kolanovic believes the market is overpricing risk.

“If the economy falls into a recession, it will probably be moderate by historical standards,” BofA said. “The economy has relatively few imbalances, and therefore the risk of nasty feedback loops is lower than normal.”

He laid out three reasons why the United States could avoid a full recession. The first is that the economy has just one big imbalance: an overheated labor market.

In April, the US unemployment rate was 3.6% as businesses struggled to hire staff, and the number of Americans actively seeking work remained below pre-pandemic levels. BofA expects the rate to fall to 3.2% next year.

That labor shortage means employers must pay higher wages to hire staff, fueling inflation.

Given that, the Fed will have to raise the unemployment rate in 2023 and 2024, according to BofA. Your reference case calls for a 1% increase to do the trick, or 2% in a recession.

“Second, we don’t think the Fed has to do all the work to increase the unemployment rate: workers coming back into the labor market will help,” they said.

The third reason is that they view the Fed as relatively dovish and believe it will stop raising rates once the unemployment rate starts to rise and core inflation falls to 3%, rather than its 2% target.

Read more: Goldman Sachs makes the case for investing more of your money in real assets, revealing which ones are most bullish as the stock market crashes.

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