Why Bank of America sees a soft landing, no recession for U.S. economy

Bank of America now says the U.S. will avoid a recession and achieve a soft landing. Many economists and investors have been anticipating a recession, but because the economy has been so resilient, a lot of their timelines for when that recession will occur have been pushed later into the year and into 2024. Yahoo Finance Reporter Josh Schafer explains why Bank of America strategists made their call.

Video transcript

SEANA SMITH: Calls for one of the most talked about recessions in history are starting to recede. Bank of America now sees the Fed's interest rate hike ending in a, quote, "soft landing." Yahoo Finance's Josh Schafer has the story for us. Josh, a recession, not so much a sure thing at this point in terms of the forecast.

JOSH SCHAFER: Yeah, Seana. So we're starting to see some people reeling back those recession calls that we've talked a lot about. It was first, it was going to happen in 2023, then late 2023. Then Bank of America had actually been projecting this to happen in 2024. And now, they're out today saying, you know what? That recession might just not happen at all.

So I want to walk through a couple of charts here that sort make the case that Bank of America is making for why we won't see a recession. So right now, what you're looking at is just B of A's projections for GDP growth. US economist at Bank of America Michael Gapen noted that when you look at the GDP chart itself, it's been over 2% for about quarters now.

Atlanta Fed out yesterday projecting that we're going to see 3.9% growth. So pretty big expansion realistically from what we've been seeing in this quarter. Now, again, that's a projection well out into the future for Q3. But interesting to take a look at that. And then you take a look at another chart, he points to just simply the unemployment rate, right? The unemployment rate has been relatively flat. It's been hanging around that 3.6% number, meaning the labor market continues to be tight. So you're not going to necessarily see a recession when you have this tight of a labor market.

But you do have some wins for the Fed piling up when you take a look at wages. Wages are starting to come down. And that is a key part of the discussion when we talk about inflation. So you take a look there, you can see wages falling. And that is a key point for maybe being able to also see inflation start to fall as well. So when you take a look at the inflation number and what we're looking at, with headline PCE, you can see B of A actually now thinking that inflation is going to fall at a slower pace than they initially thought, which is interesting when you think about no recession. But they're more in line with what the Fed's forecast is now, seeing us getting to that target 2% rate by about 2025.

SEANA SMITH: Yeah, certainly. Very in line with what we've heard from Powell in the past. Josh, I have a feeling that we're going to see this trend play out in the Street, right? People have been so committed to their recession calls now for the majority of the year waiting for it to happen. Do you think this is the first step just in terms of the economists fading and kind of being a little bit more realistic about the picture?

JOSH SCHAFER: Someone's going to step up and do it first, right? And this really--

SEANA SMITH: [INAUDIBLE].

JOSH SCHAFER: Of the economists we track, Bank of America is the first team to come out and really do this and say, you know what? We're not going to see that recession. a lot of them, if you read through these notes, these long economic notes, somewhere in there they've been hinting, you know, we might not see a recession, or the chances of a recession are a little bit less.

So this is the first group to really come out and say it, but it's the same thing when you think about just how these projections work. Go back to June, and everyone's projection on the S&P 500, right? One person bumps their price target. Then next thing within two weeks, five strategists have bumped their price target on the S&P 500. So I do think now it makes people a little bit more comfortable to say, maybe that recession isn't going to happen.

And to be honest, it comes in check with what Powell is saying, too, right? That has been their base case for a long time, that they think they're going to see a soft landing. And now, it seems like people are actually just starting to listen to him and seeing that play out a little bit. So maybe we'll see a pushback or maybe we'll just start talking about the 2025 recession.

SEANA SMITH: Exactly. I hope not. But we'll see. All right, Josh, thanks so much.