Chances of ‘no landing’ grows by the day: Bank of America
2024.06.21 08:27
Odds for a “no landing” scenario for the US economy grow by the day, Bank of America economists said in a Friday note, updating their outlook.
“No landing” refers to a scenario where the U.S. economy avoids both recession and significant slowdown, continuing to grow steadily despite concerns of potential economic downturns.
“We assume the main factors that drove relative outperformance of the US economy in recent years continues, including strong growth in the labor force, the catch-up effect in employment, supportive fiscal policies, and the crowding in of domestic manufacturing investment,” they wrote.
“That said, we expect the tailwind from these forces to gradually fade and US outperformance should narrow,” economists added.
Furthermore, BofA foresees moderately restrictive financial conditions, tighter bank lending standards, diminishing wealth effects, and a strong dollar.
The bank now expects a slowdown in real gross domestic product (GDP) growth from 3.1% in 2023 to 2.1% in 2024, 2.0% in 2025, and 1.8% in 2026. It attributes the temporarily faster potential growth of 2.2% to the rapid expansion of the labor force.
However, economists also anticipate that immigration flows will slow, bringing trend growth back to pre-pandemic levels of approximately 1.8%. Despite the projected GDP growth slowdown, they expect it to remain at trend through 2026.
With GDP growth expected to remain at trend over the next few years, economists believe the unemployment rate will stay low. After averaging 3.8% in the first quarter of 2024, they project the unemployment rate will peak at 4.2%.
“We see risks in both directions: diminished immigration and still-elevated labor demand could push the unemployment rate down, while strong immigration flows and a slower hiring rate could push U3 higher,” they noted.
BofA also reiterated its 2024 view, expecting inflation to decelerate but remain sticky due to the slow decline in services inflation.
In terms of monetary policy path, the bank’s economists think the Federal Reserve will begin cutting rates in December quarterly to a terminal of 3.5- 3.75% in 2026.
“The main risk, as we see it, is that inflation remains sticky enough to keep the Fed on hold for longer than we expect,” BofA cautioned.
