After a series of optimistic economic indicators that led many Wall Street analysts to retract their recession calls, Bank of America’s chief economist, Michael Gapen, remains steadfast in his belief that a mild recession will still hit the US economy in the first half of 2024. Despite recent positive data surprising to the upside, Gapen presents three key reasons to support his bearish stance. This article examines the factors that contribute to his outlook and considers the contrasting viewpoints of his peers on Wall Street.
Bullish Economic Data and Revised Forecasts:
In the face of a year-long wave of recession predictions, recent economic data has painted a more positive picture. Revised estimates revealed that the US economy experienced 2% growth in the first quarter of the year, while government data indicated the addition of 209,000 jobs in June, driving the unemployment rate down to 3.6%. Additionally, the New York Federal Reserve introduced a new inflation measure suggesting a lower rate of consumer price increases compared to previous gauges.
Gapen’s Lingering Concerns:
Despite the optimistic figures, Gapen remains cautious and offers three primary reasons to support his bearish outlook.
- Tight Credit and Weak Demand for Loans: Gapen raises concerns about a credit crunch, highlighting the significant slowdown in loan growth across various categories based on Senior Loan Officer Opinion Surveys (SLOOS). Banks have tightened lending standards since the issues faced by regional banks in March. Gapen warns that additional interest rate hikes could exacerbate regional bank stress, leading to further credit tightening, which may negatively impact investment, employment, and spending.
- Student Loan Repayment Aftershock: Another concern for Gapen is the recent rejection by the Supreme Court of the Biden administration’s student loan debt relief plan. With loan repayments set to resume, Gapen argues that this will have knock-on effects on other forms of debt, such as credit cards and auto loans, potentially increasing delinquency rates over time. Moreover, the resumption of student loan repayments is likely to reduce consumer spending, a key driver of the US economy, particularly affecting lower-income consumers burdened by repayment obligations.
- Labor Market Vulnerabilities: Gapen expresses apprehension regarding the labor market, noting that job gains have outpaced GDP growth in recent quarters. He suggests that businesses have hoarded workers despite tepid demand, resulting in a drop in worker productivity. This unsustainable dynamic could lead to a scenario where payrolls slow significantly or even decline. Gapen predicts a decline in GDP for two consecutive quarters in early 2024, accompanied by a rise in the unemployment rate.
Differing Views on the Horizon:
While Gapen maintains his bearish outlook, some of his peers on Wall Street offer a more optimistic perspective. Morgan Stanley’s chief U.S. economist, Ellen Zentner, considers the latest jobs report as evidence of a soft landing for the economy, while Moody’s Analytics chief economist, Mark Zandi, describes it as “close to perfect.” These contrasting viewpoints raise questions about the validity of recession concerns and suggest that a different economic trajectory may be unfolding.
Conclusion:
Despite recent bullish economic data, Michael Gapen, Bank of America’s chief economist, remains skeptical and maintains his bearish outlook, projecting a mild recession in the first half of 2024. His concerns about tight credit, student loan repayments, and potential weaknesses in the labor market shape his cautious stance. However, differing opinions within the financial industry reflect the complexity of economic forecasting. As time unfolds, only the future will reveal which outlook proves more accurate.
