BofA Dumps Its Recession Call. Why Economists Are Getting More Upbeat
Economists at Bank of America became the first group at a major bank to back away from a forecast that a recession is on the way. Others may follow, possibly swiftly.BofA ‘s (ticker: BAC) Michael Gapen and his team said in a research note on Wednesday that given recent economic data, they now anticipate a “soft landing” for the economy rather than the recession they had expected to hit in the first half of next year. That is another way of saying they expect economic growth to slow down, rather than going into reverse.
The turnaround follows news last week that the staff of the Federal Reserve is no longer forecasting a recession.
There is a case for optimism. Even though the Fed has raised interest rates by 5.25 percentage points since March 2022 as it battles inflation, gross domestic product rose 2.4% on an annual basis in the second quarter, defying expectations. Inflation has fallen from 9% in June last year to 3% more recently, raising hope that the central bank could soon be finished with its effort to rein in price growth by reducing demand for goods and services.
Jobs growth is healthy. The unemployment rate—at 3.6%—remains at near record lows, and economists expect that it won’t budge when data for July comes out Friday.
BofA now expects GDP to grow 2% annually this year, up from the 1.5% predicted earlier.
Still, recent notes from economists at major banks show a recession as their base case. Economists at Morgan Stanley (MS) have always called for a soft landing but Deutsche Bank (DB) predicts a mild recession is likely to set in toward the end of this year. Wells Fargo (WFC) economists predict a recession in the first half of next year. Citigroup (C) sees a recession starting in the U.S. in the first quarter of next year.
There are plenty of reasons for caution. A Fed survey released on Monday showed that during the second quarter, banks tightened lending terms the most since early in the pandemic, which could slow the economy by making it harder or more expensive to borrow.
At the same time, competition for staff among employers, plus strong travel demand, risk fueling inflation in the services sector. That could give the Fed reason to keep on raising rates, which might lead to a downturn as the increases it has already rolled out take full effect.
Still, other economists can change their tune. “Our confidence in our recession call has come down,” Wells Fargo chief economist Jay Bryson told Barron’s. “Gun to our head, we still say yes [recession] is more likely than not,” but the probability is now 60% versus 70% three months ago.
Further signs that inflation is moderating, Bryson said, will be the biggest determinant of whether his team joins the soft-landing camp. Slower wage growth could make a difference as well, he said.
In a note on Friday, Deutsche’s Brett Ryan said the “probability of a soft landing is undeniably on the rise” and that the economic data over the next couple months will be crucial for any change in his outlook. The firm’s recession-probability model, which predicts a major downturn over the next year, ticked down slightly moving toward a 90% level, according to a note from the bank on Wednesday.
Citigroup’s Nathan Sheets wrote on July 21 that while he is concerned about inflation in the services sector, “the probability of ‘soft landing’ scenarios has risen.”
CEOs at S&P 500 companies have also been more upbeat about the economy. Chief executives at PNC Financial Services Group (PNC), KeyCorp (KEY) and Fifth Third Bancorp (FITB) are among the many who are predicting a soft-landing scenario.
The stock market also seems to be optimistic. The S&P 500 was up 18% this year at 4515.25 on Wednesday afternoon. Citigroup strategists this week said they expect the index to reach 5000 by the middle of next year, adjusting their previous target of 4400. Piper Sandler (PIPR) strategists did the same. Morgan Stanley’s Mike Wilson, a known skeptic within the strategist community, has been more upbeat too.
BofA Dumps Its Recession Call. Why Economists Are Getting More Upbeat.
The bank's economists said that given recent data, they now see a so-called soft landing. The Fed's staff has backed away from a recession forecast as well.
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