Bank of America says to expect 'mild recession' this year

Bank of America (BofA) adjusted its economic forecast on Wednesday to show that a "mild recession" could occur in the U.S. as soon as this year.

BofA predicted that real GDP in the fourth quarter of 2022 will decline by 1.4%, followed by a 1% increase in 2023. The bank explained that this will help moderate decades-high inflation levels.

"Our previous baseline outlook for the US economy featured a growth recession (e.g., output growth remaining positive, but below our estimate of potential), but a number of forces have coincided to slow economic momentum more rapidly than we previously expected," Bank of America stated in a note to clients. "Perhaps most worrisome to us is the trend in services spending, where revisions to prior data and incoming data, including from our BAC aggregated credit and debit card data, point to less momentum than we had been assuming."

Inflation surged in June to a new 40-year high, marking the fifth time it's broken that record this year. The Consumer Price Index (CPI) increased by 9.1% annually, hitting its highest point since November 1981, according to the Bureau of Labor Statistics (BLS).

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Americans cut expenses amid rising inflation

Some of the decline in consumer spending is due to an "inflation tax," according to BofA. The recent rise in inflation has been spurred by higher food and energy prices, causing Americans to cut back on these expenses or reduce their discretionary spending to afford higher prices on necessity items. 

It also seems that Americans are changing their minds about buying new homes and cars as inflation continues to rise, according to a new survey from Quicken.

About 30% of Americans had planned to buy a car in 2022, but rising inflation has led about 60% of them to reconsider, according to the survey. Another 21% said they had planned to buy a home this year, but 69% of them said they are now reconsidering that choice. 

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Fed likely to continue raising interest rates

Despite the threat of an upcoming recession, the Federal Reserve is still likely to continue raising interest rates, according to BofA’s forecast. 

"The Fed has communicated its desire to restore price stability and a willingness to accept at least some pain in labor markets in the process," BofA stated. "We look for the Fed to raise the target range for the federal funds rate to 3.25-3.5% by year-end, including another 75bp hike at the upcoming July FOMC meeting."

The Federal Reserve recently released the minutes from its June meeting, showing that another 75-basis point rate hike could be on the table at its next Federal Open Market Committee (FOMC) meeting in July. In June, the Fed raised rates by 75 basis points, the highest increase since 1994. This was the third interest rate hike of 2022 and pushed the federal funds target range to 1.5% to 1.75%.

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