Bank of America has lowered its economic forecasts for this year to a “mild recession.”
The bank believes that “a mild recession” will strike the American economy this year, with the economy expected to shrink 1.4 percent over last year’s end. It sees a comeback in growth next year but barely so. In 2023, it predicts just one percent expansion.
“We have seen numerous forces combine to set back economic momentum more quickly than we had anticipated,” said a group of Bank of America economists led by Michael Gapen.
The bank dubbed “the most concerning” trend in services spending, which includes “revision to past data and incoming data, as well as from our BAC aggregated debit and credit card data, indicate not as much momentum as we had been predicting.”
Inflation is also a factor in deterring consumers from spending money. It is lowering consumer expenditures by pushing up the prices of necessary items such as gasoline, housing, and food.
“We believe at least part of the downturn in consumer spending momentum is attributable to the ‘inflation tax,’” according to the note. “Households may have less money available for discretionary purchases as a result of much of the recent increase in inflation coming from energy and food costs, which are commodities that face highly elastic demand in the short run.”
The combination of higher mortgage rates and steep home prices is stalling housing sales and construction, resulting in an economic drag.
The Federal Reserve, according to Bank of America, has “become more committed to utilizing its tools in order to help restore price stability and a willingness to endure at least some pain in labor markets.”
“Our new outlook implies that the Fed will have to endure more suffering than it wants, but if our view proves correct, we think most FOMC members would be willing to endure the pain.”
According to the bank, unemployment is expected to increase from 3.6 percent to 4.6 percent.
The good news is that this hasn’t slowed down the economy much. The bright side of the bank’s more pessimistic view is that inflation will now be expected to fall somewhat faster than previously anticipated, leaving it in line with the Federal Reserve’s two percent target at the end of 2024. That might allow the Fed to change its monetary policy stance sooner than previously anticipated.
“We aren’t suggesting a major recession is required in order to achieve 2 percent inflation in the long run. Rather, we think that the addition of a small recession and some more supply chain constraint reduction will be enough to put aggregate supply and demand back into better balance.” The bank added.