- Wednesday, October 16, 2024
Economists at Bank of America (BofA) have recently revised their forecast, diverging from previous expectations of an upcoming recession. Michael Gapen and his team at BofA now anticipate a "soft landing" for the economy, indicating a slowdown rather than a reversal in economic growth, contrary to their earlier projections of a recession in the first half of next year.
This shift in perspective aligns with the recent announcement that the Federal Reserve's staff is no longer forecasting a recession. While the Fed has been combating inflation by raising interest rates by 5.25 percentage points since March 2022, the gross domestic product (GDP) defied expectations and grew by 2.4% on an annual basis in the second quarter. Inflation has also decreased from 9% in June last year to a more recent 3%, raising hopes that the central bank may soon conclude its efforts to curb price growth.
Additionally, the job market remains robust, with an unemployment rate of 3.6% that is expected to remain steady when July data is released on Friday.
As a result of these factors, BofA now predicts an annual GDP growth of 2% this year, an increase from their previous forecast of 1.5%.
However, it is worth noting that other major banks still foresee a recession as their base case. While Morgan Stanley has consistently called for a soft landing, Deutsche Bank predicts a mild recession toward the year's end, and Wells Fargo economists anticipate a recession in the first half of next year. Citigroup also foresees a recession beginning in the first quarter of next year in the United States.
Given the recent tightening of lending terms by banks, as revealed in a Fed survey released on Monday, there are still reasons for caution. This tightening could potentially slow down the economy by making borrowing more challenging or expensive.
Overall, the revised forecast by BofA economists suggests a more optimistic outlook for the economy, albeit with cautious considerations amidst differing opinions from other major banks.
Economic Outlook: Soft Landing or Recession?
As the competition for talent intensifies and travel demand remains strong, there are concerns that inflation in the services sector may be fueled. This could potentially lead to further rate increases by the Federal Reserve, ultimately resulting in an economic downturn.
However, some economists are changing their tune. Wells Fargo's chief economist, Jay Bryson, has expressed a decreased confidence in their recession call. While they still believe a recession is more likely than not, the probability has dropped from 70% to 60% over the past three months.
For Bryson and his team, the moderation of inflation and slower wage growth will be key indicators of whether they join the soft-landing camp. They are closely monitoring the economic data over the next couple of months to make any adjustments to their outlook.
Deutsche's Brett Ryan also sees the probability of a soft landing on the rise. The firm's recession-probability model has slightly decreased to around 90%, emphasizing the importance of upcoming economic data.
Citigroup's Nathan Sheets shares a similar sentiment, acknowledging his concerns about inflation but also noting the increased likelihood of a soft-landing scenario.
Even CEOs at S&P 500 companies are expressing optimism about the economy. Many, including those at PNC Financial Services Group, KeyCorp, and Fifth Third Bancorp, foresee a soft-landing scenario.
The stock market is also reflecting this optimism. The S&P 500 has shown an 18% increase this year, reaching 4515.25 as of Wednesday afternoon. Citigroup and Piper Sandler strategists have adjusted their previous targets in anticipation of continued growth. Even Morgan Stanley's Mike Wilson, known for his skepticism, has become more upbeat.
It remains to be seen whether inflation will continue to moderate and wage growth will slow down. These factors will be crucial in determining whether the economy experiences a soft landing or heads towards a recession.
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