Bloomberg — Bank of America Corp. (BAC) economists cut their growth outlook for the U.S. economy in 2022 and 2023 and raised inflation estimates for next year, as supply chain problems and a tight labor market continue to push prices up.
Gross domestic product could grow 2.6% this year, down from an earlier projection of 2.7%, economists led by Ethan Harris said in a report to clients on Friday. They lowered the growth estimate for 2023 to 1.5% from 1.8% previously.
They maintained their outlook for an increase in the price index of basic personal consumption expenses to 4% this year, but raised their projection for 2023 to 3%, from 2.6%.
“We are increasingly pessimistic about the year ahead as key inflation indicators continue to signal a larger persistent component and severe labor market overheating remains,” the economists wrote in the report.
Bank of America is the latest firm to cut its forecasts or raise its risk outlook. This week, JPMorgan Chase & Co. (JPM) lowered growth estimates, while Deutsche Bank AG (DBN) in late April forecast a deep US recession next year. Goldman Sachs Group Inc. (GS) has said it sees chances of a contraction of around 35% in the next two years.
Bank of America economists said “severe overheating” in the US labor market is putting upward pressure on wages, which could require the Federal Reserve to raise the unemployment rate in 2023 and 2024.
“As a general rule of thumb, we believe that leveling wage growth will require the unemployment rate to return to 4%, along with a drop in job openings and very slow payroll growth,” they wrote.
The Fed raised interest rates by half a point this month and signaled it will carry out similar rate hikes in June and July. Federal Reserve Chairman Jerome Powell said this week that the US central bank. would keep raising rates until it is “clear and convincing” that inflation is slowing, warning that it might require an increase in the unemployment rate.
“What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see it,” Powell said Tuesday during a live Wall Street Journal event.
Bank of America economists said they expect the Fed to raise rates by half a point in the next two meetings, followed by quarter-point hikes until the benchmark rate hits 3.25% to 3.50% in May. of 2023.
Economists said Fed policymakers could face some “tough decisions” in the near term, with a one in three chance the US economy slips into recession next year. Even so, if there is a recession, they said they expect it to be mild thanks to manageable debt loads and good credit quality.