Bank of America economists became the latest experts predicting the U.S. will fall into a recession over the next year, telling clients a number of forces have pushed the economy to slow more rapidly than they previously expected as the latest inflation data shows surging prices fueling the concerns are only getting worse.
“Economic momentum has faded,” Bank of America economists led by Michael Gapen wrote in a Wednesday morning note, saying they now forecast a “mild recession” this year, with fourth-quarter gross domestic product falling 1.4% (compared to a 6.9% increase last year) followed by an increase of 1% in 2023.
The team said consumer spending in the services sector has been “perhaps most worrisome,” after data showing consumer spending fell in May for the first time this year, with retail giants including Walmart and Target reporting that wary Americans have shifted dollars away from leisure items, and toward necessities and cheaper goods.
The economists blamed “at least some of the decline” on the “inflation tax,” referring to the recent rise in consumer prices that’s pushed food and energy prices to the highest level in decades; they said morning data showing inflation spiked a worse-than-expected 9.1% last month is further proof the so-called tax will weigh on consumer spending and fuel a recession this year.
Though most banks—including Goldman Sachs and Morgan Stanley—continue to believe the U.S. is likely to avoid a recession this year, Bank of America’s economists join a growing wave of firms that are less optimistic as a result of the Federal Reserve’s efforts to combat inflation with interest rate hikes, which deter spending by making borrowing more expensive.
Earlier this month, Japan-based Nomura warned many of the world’s leading economies—including the U.S., U.K. and South Korea—will fall into a recession within the next 12 months as central banks become “very aggressive” in fighting inflation.
“[Another] factor behind our change in thinking comes from monetary policy, where the Fed has become more committed to using its tools to help restore price stability, with a willingness to accept at least some pain in the process,” the Gapen-led team said Wednesday, pointing out Fed Chair Jerome Powell Chair Powell has been explicit in saying it will be “quite challenging” to stabilize prices while avoiding a recession.
The U.S. economy posted its worst showing since the Covid-induced recession in the first quarter, shrinking 1.6% despite expectations originally calling for 1% growth. The worse-than-expected decline makes a second straight quarterly decline in GDP “much more likely,” Pantheon Macro chief economist Ian Shepherdson said earlier this month, forecasting that GDP fell 0.5% in the second quarter. However, he believes the job market remains strong enough to help avoid a recession—particularly after robust data for last month. Economists at Goldman Sachs agree, telling clients earlier this week that it would be “historically unusual” for the labor market to appear so strong during a recession.