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Maybe the 'most anticipated recession' won't come after all

The calls for one of the most talked-about recessions in history are starting to recede.

"We have revised higher our outlook for growth in economic activity this year and next, and no longer expect the economy to fall into a mild recession," Bank of America US Economist Michael Gapen wrote on Tuesday.

Bank of America now sees the Fed's interest rate hike ending in a "soft landing, where growth falls below trend in 2024, but remains positive." The shift by Bank of America's team of economists from a mild recession in 2024 to no recession at all comes amid growing optimism about the state of the US economy.

Fed Chair Jerome Powell said last week central bank staff no longer sees a recession in 2023. Goldman Sachs recently kicked down its odds of a recession in the next 12 months to 20% from 25%. Its chief economist Jan Hatzius was in line with Gapen's call, as Goldman forecasts the next phase of the US economy will be "unspectacular growth." Even corporations like Caterpillar (CAT) are saying business activity is progressing better than initially feared.

And forward-looking indicators for the current quarter are increasing, too. The Atlanta Fed's GPDNow forecaster, which tracks gross domestic product in the US, increased its projection for the 2023 third quarter on Tuesday. It's now projecting economic growth to accelerate to 3.9% in the third quarter, which would be the best quarterly performance for the metric since the fourth quarter of 2021.

An upward revision to first quarter GDP and a recent preliminary reading on second quarter GDP showed the economy has grown at 2.0% or better for the last four quarters.

"Whereas the as-reported data was pointing to a slowdown in activity earlier this year, revisions took this signal away and, together with recent data, point to ongoing resilience," Gapen wrote.

'The most anticipated recession'

In early July, Invesco global markets strategist Brian Levitt told Yahoo Finance Live the US economy was headed for "the most anticipated recession you could imagine," echoing Wall Street's broad consensus that the Fed's interest rate hiking cycle would end with an economic downturn.

But the Fed just raised interest rates to the highest levels since 2001 and economic data is showing more resilience than expected. The Fed's preferred inflation measure just hit its lowest level in nearly two years. Meanwhile wage growth grew at its slowest pace since the fourth quarter of 2021 in the three-month period from April to June, per data from the Bureau of Labor Statistics.

And on Wednesday, the ADP Employment Report showed the US added 324,000 private payroll jobs in July, well above expectations for 190,000 adds, per Bloomberg consensus data.

"While our forecast includes stronger growth outcomes, the mix of incoming data indicates that resilience in economic activity is also coinciding with diminishing inflationary pressures and still-low unemployment," Gapen wrote. "There is a lot in this forecast for the Fed to like, in our view."

Federal Reserve Chairman Jerome Powell testifies during the House Financial Services Committee hearing
Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing on June 21, 2023. (Tom Williams/CQ-Roll Call, Inc via Getty Images)

Still, as Gapen and BofA note, the path to the Fed's 2% inflation target remains far off. BofA projects another Fed rate hike at the September meeting and then a slower-than-initally-thought cutting cycle over the next several years starting with the first rate cut in June 2024.

There are two inflation reports between now and the Fed's next meeting in September, though, and more progress on the inflation front could push the Fed to wait until November to hike rates once more, or perhaps not hike again at all.

But for now BofA's view is closer in line with how the Fed sees the end of its rate hiking cycle playing out.

"It has been my view consistently that we do have a shot [at a soft landing], and my base case is that we will be able to achieve inflation moving back down to our target without the kind of really significant downturn that results in high levels of job losses that we've seen in some past instances, many past instances of tightening that look like ours," Powell said on July 26.

"That's been my view, that's still my view. And I think you know, that's sort of consistent with what I see today."

Josh Schafer is a reporter for Yahoo Finance.

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