(CNN Business) – Bank of America warned on Wednesday that the US economy is slowing faster than feared due to rising inflation and is likely to suffer a recession later this year.
This is the first time that Bank of America has publicly predicted a recession since the outbreak of the pandemic in early 2020. A growing number of major banks have predicted a recession this year or next, although others argue that the US economy is in the dark. You can still avoid it.
“Momentum in the national economy appears to be slowing. The inflation tax takes away households’ ability to spend on discretionary items at an accelerating rate,” Michael Gaben, an economist at Bank of America, said in a phone interview with CNN.
Bank of America says there are ‘worrying trends’
The Bank of America issued its recession warning ahead of its June inflation report, which was released on Wednesday and came in worse than expected. Gaben said the CPI, which posted its biggest increase since November 1981, gives him “more confidence” that a recession will come because it shows just how pervasive the inflation problem is.
“You can’t say it’s just an energy issue,” he added.
Bank of America cited “disturbing” trends in spending on services, including the bank’s debit and credit card data, which indicated more weakness than expected.
The good news is that Bank of America sees a “moderate” recession, not a more severe crash like the Great Recession that began in late 2007.
Real GDP is expected to fall 1.4% this year, before rebounding by 1% next year, Bank of America said.
What can happen with unemployment?
The unemployment rate is expected to rise from the historically low level of 3.6% now to 4.6%. However, this number will be significantly lower than the peak of April 2020, which was close to 15%.
By the end of next year, Bank of America expects the Fed to change course and begin cutting interest rates, after a series of steep hikes aimed at curbing inflation.
Other economists are more optimistic.
Goldman Sachs said this week that the risk of a recession over the next year is only 30%, although it has risen to nearly 50/50 over the next two years. Wall Street said that despite market fears of an imminent recession, “we have doubts that the economy is indeed in a recession.”
Bank of America said the most likely alternative to its warning is for the US economy to avoid a short-term slowdown and require a second round of interest rate hikes by the Federal Reserve in late 2023 or 2024.
“We suspect that the Fed will likely have to re-enter markets with a second round of tightening once it becomes clear that the economy has continued to exceed its long-term potential,” Bank of America said.