Bank of America: Potential Risks for the Economy Unveiled

**Recent Positive Economic Data Puts a Damper on Recession Calls**

After months of pessimistic predictions, recent data has prompted many top minds on Wall Street to rethink their recession forecasts. Bank of America’s chief economist, Michael Gapen, who initially predicted a recession last July, has revised his forecast multiple times over the past year. Despite the positive economic indicators, Gapen still maintains that a “mild recession” is likely in the first half of 2024.

**Reasons to Be Cautious**

Gapen provides three key reasons why he believes a recession is imminent, despite the recent optimism from others in the industry:

**1. Tightened Credit and Weakening Demand for Loans**

One of Gapen’s concerns is a credit crunch caused by a significant slowdown in loan growth, as indicated by recent Senior Loan Officer Opinion Surveys. Furthermore, banks have tightened their lending standards due to the fallout of regional banks like Silicon Valley Bank and Signature Bank. Gapen warns that additional rate hikes could result in further credit tightening, negatively impacting investment, employment, and spending.

**2. Student Loan Repayment Aftershock**

Gapen points to the Supreme Court’s rejection of the Biden administration’s student loan debt relief plan as another reason for concern. With the resumption of student loan repayments in the near future, there will likely be knock-on effects such as increased delinquency rates in other debt categories, reduced consumer spending, and potentially lower economic growth. Moody’s Analytics also warned about the negative impact of student loan repayments on household finances and consumer credits.

**3. Challenges for the Labor Market**

Despite the labor market’s resilience in the face of interest rate hikes, Gapen believes there are more difficulties ahead. While job gains have exceeded GDP growth, it is mainly due to businesses hoarding workers out of fear of hiring issues similar to those experienced during the pandemic. This has led to a decline in worker productivity and could result in a weaker economy if GDP growth does not catch up.

**Recession Scenario**

Gapen predicts a decline in U.S. GDP for two consecutive quarters in early 2024, albeit by just 1.5%. He also expects the unemployment rate to peak at 4.7% next year. Despite overall economic growth, Gapen sees enough areas of concern to maintain his belief in a mild recession beginning in the first half of 2024.

**Dissenting Voices**

While Gapen remains bearish, other economists on Wall Street suggest a more positive economic outlook. Morgan Stanley’s chief U.S. economist, Ellen Zentner, interprets the latest jobs report as evidence of a soft landing for the economy. Moody’s Analytics chief economist, Mark Zandi, also sees the report as close to perfect. These contrasting opinions prompt the question: Is it time for the bears to retract their recession calls?

**In Conclusion**

– Recent positive economic data has caused some economists to revise or retract their recession predictions.
– Bank of America’s chief economist, Michael Gapen, still believes a mild recession is likely in the first half of 2024.
– Gapen’s concerns include tightened credit, the resumption of student loan repayments, and challenges in the labor market.
– Gapen expects a decline in GDP and predicts a peak in unemployment in 2023.
– Other economists on Wall Street have a more positive outlook, citing the latest jobs report as evidence of a soft landing for the economy.
– The divergence of opinions raises the question of whether it is time for the bears to rethink their recession calls.

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