**Bank of America Research Revises Outlook for US Economy: A Shift from Recession Predictions**
Bank of America Research has recently released a research note titled “U.S. Economic Viewpoint”, providing insights into the outlook for the US economy. This analysis marks a departure from the recession predictions that were consistently put forward by chief US economist Michael Gapen since last summer. The article examines Gapen’s shifting perspective and compares it with the outlook of Goldman Sachs, shedding light on the factors influencing these revised forecasts.
**A Shift in Perspective**
Previously, Gapen had warned of a likely recession by the end of 2022, citing rising interest rates and stubborn inflation as factors that could negatively impact consumers. However, the timing of this recession forecast underwent several revisions. Last September, Gapen moved the recession projection to the latter half of 2023, highlighting underlying momentum in the economy despite aggressive interest rate hikes by the Federal Reserve. In June, Gapen even predicted a “growth recession” due to the resilience witnessed in the labor market. He pushed back the occurrence of the mild recession to 2024. In the face of positive economic data and growing optimism among clients, Gapen recently reiterated his prediction of a mild recession next year but was compelled to acknowledge the surprise upside in recent economic indicators.
**Reassessing the Outlook**
Gapen’s decision to revise his outlook for the US economy was driven by a closer examination of several key factors. For instance, while many economists anticipated a fading economic growth due to rising interest rates, this trend did not materialize. The GDP growth rate was adjusted to 2% for the first quarter and achieved 2.4% in the second quarter, surpassing economists’ consensus forecasts. Additionally, concerns that rising interest rates would result in a surge in unemployment were unfounded. Despite a reduction in job openings, the unemployment rate remained at historic lows. Recent reports even indicated that employers had added 324,000 jobs, surpassing expectations. This reduction in job openings without a sharp rise in unemployment has been predicted by Goldman Sachs’ chief economist, Jan Hatzius, since September of last year. The optimism that Gapen now shares with Hatzius can also be observed in their outlook on inflation. After peaking at 9.1% in the previous summer, year-over-year inflation decreased to just 3% in June. Gapen noted that wage and price pressures are moving in the right direction, making a wage-price spiral unlikely. Furthermore, the manufacturing and housing sectors, which are highly sensitive to interest rate changes, have shown signs of stabilization in recent months.
**The Revised Outlook**
Based on the positive economic data, Gapen revises his forecast for the US economy. He predicts a GDP growth rate of 2% for 2023, 0.7% for 2024, and 1.8% for 2025, deviating from his previous forecast of 0% growth in the next year. In terms of the unemployment rate, the bank now expects it to peak at 4.3% in the first quarter of 2025, rather than the previously estimated peak of 4.7% in the fourth quarter of 2024. Gapen anticipates a gradual deceleration of inflation to reach 2.0%, which will contribute to the Federal Reserve’s decision to end its interest rate hiking campaign gradually. Nevertheless, while Gapen’s revised outlook appears optimistic, he acknowledges that the soft landing scenario is the least supported outcome in the post-war period, with only three instances of soft landings compared to eleven recessions since World War II.
**Growing Optimism Among Economists**
Gapen’s shifting view of the US economy aligns with a trend among economists expressing increased optimism. Federal Reserve Chair Jerome Powell, for instance, stated that his staff is no longer forecasting a recession at the Federal Open Market Committee meeting in July. Bloomberg’s poll of economists also demonstrates this growing optimism, with a decrease in the estimated odds of a US recession from 70% in December to 58% in July.
Bank of America Research’s revision of its outlook for the US economy signifies a departure from previous recession predictions. Gapen’s newfound optimism is a response to positive economic indicators such as GDP growth surpassing expectations, stability in the labor market, and a decline in inflation. Despite this shift, Gapen remains cautious, acknowledging that the soft landing scenario historically has had limited support. The changing outlook for the US economy is reflective of a broader trend among economists who are becoming more optimistic about the future.