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Predictions that a recession may be looming for the U.S. economy have so far not come to fruition. Now, some experts are backing off the prediction altogether, including Federal Reserve staff economists.
“What’s out: Mild recession,” states new economic research released by Bank of America this week.
“What’s in: Soft landing, no recession,” the firm’s research declares.
Economists and other experts have been calling for a downturn for a more than a year now, mostly due to high inflation and the steps policymakers have been taking to curb it. Officially, a downturn is defined as defined as a decline in gross domestic product for two consecutive quarters.
As the Federal Reserve has embarked on a series of interest rate hikes to bring inflation down to its 2% target, the concern has been that may tip the economy into a recession.
Inflation has subsided, though it is still above 2%, per the latest government data.
The unemployment rate is still at “near all-time lows,” Bank of America noted. Friday’s jobs report showed the unemployment rate was 3.5% based on new July data, “just above the lowest level since late 1969.”
Unemployment and other factors — growth in economic activity, wage and price pressures in the “right direction” — prompted Bank of America to reassess its previous calls for a mild recession in 2024.
While the firm is weighting those baseline expectations for a soft landing at 45% to 50%, other outcomes are still possible.
“We still think the most likely alternative is a mild recession,” said Michael Gapen, head of U.S. economics at Bank of America, which the firm puts at odds of 35% to 40%.
Meanwhile, the most optimistic outcome, with stronger GDP growth, comes in at 10% to 15%.
Recessions historically tend to be caused by black swan events — unpredictable circumstances that come as a surprise — that are difficult to precisely forecast, noted Mark Hamrick, senior economic analyst at Bankrate.
“I don’t have much confidence at all in the ability to predict the timing of a recession unless there’s an event that’s right in front of us that suggests that one is imminent,” Hamrick said.
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Other experts point to the Federal Reserve’s role in steering the economy.
“When we get a recession, it tends to be because we had a problem with monetary policy,” said William Luther, director of the Sound Money Project at the American Institute for Economic Research.
As Fed officials target a soft landing for the U.S. economy, several moving factors will continue to affect Americans’ wallets in the coming months.
1. Cooling inflation may not prompt lower prices
People stand at the check-out counter after shopping at a grocery supermarket in Alhambra, California, on July 13, 2022.
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While the U.S. economy is not in a recession, many Americans think we’re already in a downturn, various surveys show. Moreover, some people fear a downturn as severe as the Great Recession.
Blame high inflation, which has prompted prices on everyday items consumers buy to soar.
“When inflation picks up, people become more pessimistic in general,” Luther said. “The general public does not like inflation.”
Bank of America’s new projections see inflation slowing more gradually, with the Federal Reserves preferred measure for inflation — the personal consumption expenditures, or PCE — falling to 2% year over year in the second half of 2025.
While that’s going in the right direction, households will still have to play catch up, Gapen said.
“Just because inflation comes down doesn’t mean the level of these prices come down,” Gapen said. “Just the rate at which they’re rising slows.”
For example, a steak dinner that now costs $50 at a New York restaurant may rise to $52 instead of $60 as inflation slows. But the price won’t come down to $35, he said.
To recover, consumers will have to have their wages catch up to where inflation is, which could take a few years, Gapen said.
2. There may be further moderation in hiring
A sign posted outside a restaurant looking to hire workers in Miami, May 5, 2023.
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While the unemployment rate came in at 3.5% in July, that may tick up and peak at 4.3% in 2025, Bank of America projects.
“I think the labor market will continue to cool,” Gapen said. “The question is do we get large-scale layoffs? Right now, the data doesn’t support that.”
Employers have announced plans to cut 481,906 jobs in the first seven months of this year, up 203% from 159,021 cuts for the same period in 2022, according to Challenger, Gray & Christmas, Inc., a global outplacement and business and executive coaching firm.
That year-over-year percentage change for job cuts has declined steadily in recent months as companies seek other ways of cutting costs rather than letting go of workers, according to Challenger’s research.
For many employers, that means slower hiring.
The unemployment rate has been between 3.4% and 3.7% since March 2022, Hamrick noted.
While the last two recessions brought much higher unemployment rates, with 10% in October 2009 and 14.7% in April 2020, a future downturn does not necessarily have to bump joblessness up as high, he said.
“Recessions don’t always bring double-digit unemployment rates,” Hamrick said.
3. Now is the time to lock in high rates on cash
The Federal Reserve approved a new hike in July that brought interest rates to the highest levels in more than 22 years. The central bank could raise rates again before the year is over.
Bank of America expects one more 25 basis rate hike this year. However, the firm also foresees rate cuts poised to begin in June 2024. The firm’s outlook projects cuts of 75 basis points in 2024 and 100 basis points in 2025.
“The biggest risk at the moment is that the Federal Reserve will over tighten monetary policy,” Luther said. “If it is too tight, then we will have a recession.”
If the Fed overcorrects, interest rates may start coming down next year, he said.
While Hamrick said it is premature to “place a heavy bet” on rate cuts, there are strategic moves investors may want to make now, he said.
High rates have pushed the average credit card rate to 20.5%, even for well-qualified borrowers, Hamrick noted. On the flip side, savers are able to earn 3% to 5% on their savings.
“This is the time to try to bolster emergency savings while looking to achieve other financial goals like saving for retirement and paying down debt,” Hamrick said.
For people who do not need immediate access to their cash, it may be a good idea to lock interest rates in with longer-dated terms, such as with a certificate of deposit, he said.