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There won’t be a true recession anytime soon—but a ‘growth recession’ is still on the menu next year, BofA warns



After taking over the chief economist gig at Bank of America last July, Michael Gapen quickly warned that the U.S. economy was headed for a “mild recession” by year’s end. Gapen’s predecessors had long avoided overly bearish predictions, but he feared the worst amid persistent inflation and rising interest rates. However, the former Barclays exec revised his initial forecast in September after consumer spending and the labor market “held up” better than he’d expected, arguing a mild recession wouldn’t come until the first half of this year. 

And now, like many of his peers, Gapen’s forecasts have proven to be, at the least, a bit premature. Despite stubborn inflation and doomsday predictions from billionaire investors, the U.S. economy continues to push forward, with the unemployment rate sticking near pre-pandemic lows and retail sales proving to be resilient. The stock market has also rebounded after a dismal 2022. The S&P 500 is now up more than 15% year-to-date amid investors’ increasing enthusiasm over the potential for A.I. to reshape the global economy. 

The good news forced Gapen to revise his recession forecast once again this week. He now says there’s going to be a “softer” downturn, and it won’t come until 2024.

“We have taken on board the improved risk backdrop and further evidence of resilience and moved out the timing of our anticipated downturn,” the economist wrote in a Wednesday note to clients. “We acknowledge that this is not the first time we have done so.”

Gapen said he wants to avoid “forecasting a perpetual downturn six months into the future,” but added that he still believes the Federal Reserve will be forced to raise interest rates until there is a significant increase in unemployment if it wants to tame inflation. Although year-over-year inflation slowed from its June 2022 high of 9.1% to 4% last month, it remains well above the central bank’s 2% target rate.

“That said, we have softened the magnitude of the downturn given the improved picture on labor supply and evidence that some disinflation has occurred without any real backup in the unemployment rate,” Gapen wrote. “Our forecast is now as much a ‘growth recession’ as it is a ‘mild recession.’”

A growth recession involves a period of low, but positive economic growth and rising unemployment, whereas a pure recession is a period of widespread and sustained economic contraction, usually defined as two quarters of negative GDP growth.

Gapen said he updated his recession forecast this week due in part to a “rapid rebound in labor supply” caused by increased immigration and improved workforce participation rates. This rebound has helped the unemployment rate to remain low and held down wage growth, enabling inflation to fall from its June 2022 four decade high without sparking a recession, he said.

Risks to U.S. economic growth have also begun to fade in recent months, according to the economist, who pointed to examples like the passage of the debt ceiling and the Fed’s actions to “contain stresses” at regional banks after the blowup of Silicon Valley Bank in March.

“We did not expect adverse fireworks from a debt limit debacle, but nonetheless, its passing reduces uncertainty,” he wrote. “In addition, while it is too early to declare ‘all clear’ on risks of a credit crunch in bank lending, stresses in the regional banking sector do not appear to be getting worse, and spillovers have so far been avoided.”

Gapen also noted that the Biden Administration’s CHIPS and Inflation Reduction Act (IRA), and Infrastructure Investment and Jobs Act (IIJA), which are “aimed at spurring investment in the manufacturing sector” have helped boost economic growth.

He said he now expects U.S. GDP to rise 1.1% in the fourth quarter of this year, compared to his September prediction for a 0.2% drop. But the economist lowered his forecast for 2024 GDP growth from 0.9% to 0%, arguing the economy will spend much of next year recovering from its first half growth recession.
Bank of America isn’t the only investment bank to turn bullish on the economy recently either. Goldman Sachs economists revised their recession forecast earlier this month as well, arguing there is now just a 25% chance of a U.S. recession this year, down from 35% in March. And Stifel followed suit, with analysts claiming there won’t be a “textbook recession” anytime soon.

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