Back in July, Bank of America hired Michael Gapen as its chief U.S. economist, and the former Barclays exec began his tenure with a gutsy call, arguing a “mild recession” would hit the U.S. by the end of the year.
Before Gapen’s hiring, Bank of America’s economists had refrained from using the R-word, even if many of their peers weren’t so shy. But Gapen highlighted weaker-than-expected services spending, fading fiscal support, persistent inflation, and rising interest rates as his evidence for a more bearish outlook.
On Friday, however, Gapen and his team of economists said the situation has changed over the past few months.
They noted that U.S. gross domestic product growth is showing “underlying momentum” they hadn’t anticipated; the labor market remains hot despite the Fed’s tightening of financial conditions; and recent retail sales data shows consumer spending has “held up.”
After two consecutive quarters of negative GDP growth, Bank of America said the third quarter will show a 1.1% quarter-over-quarter rise in GDP, owing in large part to a “substantial narrowing in the trade deficit.” They’re also expecting “solid gains in real consumer spending in August” as a result of the 12% drop in gas prices last month and “softer than expected” inflation data.
“Taking these and other signals into account, we have revised our outlook for the U.S. economy in favor of a prolonged expansion, more tightening from the Federal Reserve, and a later downturn in labor markets,” Gapen and his team wrote.
However, Bank of America still predicts a “mild recession” is on the way—they just believe it won’t come until the first half of next year, instead of “late 2022.” Their argument revolves around the idea that good news can often be bad news in our current imbalanced economy.
“As we have noted for some time, strong incoming data is a double-edged sword; it reduces the likelihood of a near-term recession, but it is also likely to bring additional policy rate tightening, thereby increasing the risk of a hard landing over time,” Gapen wrote.
Gapen argues that the Federal Reserve’s commitment to reducing inflation through aggressive monetary tightening, which has been bolstered by recent stronger than expected economic data, will cause the unemployment rate to rise from 3.7% to 5% by the end of 2023.
“Although we project the [economic] expansion to last longer than before, we still expect tighter monetary policy to ultimately push the economy into a mild recession,” Gapen and his team 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. The more the Fed emphasizes price stability as the primary goal of monetary policy, the more we think the Fed is willing to stomach a larger rise in the unemployment rate to get there.”
Gapen now forecasts 1.6% GDP growth in 2022, followed by a negative 0.2% retreat in 2023 as the result of a “mild” U.S. recession.
Bank of America’s economists aren’t the only ones to notice that recent economic data has been better than anticipated.
The Biden administration put out a statement on Friday touting the recent strength in the economy, despite consistent doom-and-gloom predictions from Wall Street, as well as its recent accomplishments, including the Inflation Reduction Act, the CHIPS Act, and the American Rescue Plan.
“While it will take time and there is more work to do, including immediate work to support the U.S. economy’s transition from historic recovery to stable, steady, growth with lower inflation, the Biden-Harris administration has laid the foundation to begin tackling decades-long economic challenges and finally deliver an economy that works for working families,” the White House wrote.
Biden’s team also laid out a 58-page plan for “rebuilding the economy from the bottom up and middle out now and for years ahead,” called the “Biden-Harris Economic Blueprint,” that features goals like increasing clean energy investment, lowering the cost of prescription drugs, and making American industry more competitive.