“The ‘inflation shock’ is worsening, the ‘rate shock’ is just beginning, the ‘recession shock’ is coming,” wrote Michael Hartnett, Bank of America’s chief investment strategist, in a note to clients on Friday.
The warning followed a new government report on Tuesday showed that consumer prices rose 8.5% in March, the fastest pace since December 1981. There have been record price spikes on everything from new cars and men’s clothing to baby food and salad dressing year after year. Inflation is “out of control”. Hartnett wrote, adding, “Inflation causes recessions.”
Although the last recession was triggered by a pandemic, economic expansions are often terminated by the Federal Reserve is slamming on the brakes to fight rising inflation.
Markets are bracing for the Fed to raise interest rates quickly, at the fastest rate in decades, to keep prices under control. The risk is that the central bank will do too much and thereby ruin the economy.
“Recessive” price movements in the markets
Bank of America is not directly calling for a recession in the United States. But the bank raises the specter of a slowdown and points to recession signs on Wall Street.
Hartnett noted that price action in financial markets has been very “recessionary,” citing sharp declines in economically sensitive homebuilders, semiconductor manufacturers, small caps, retailers and private equity.
Global growth expectations among mutual fund managers surveyed by Bank of America fell to record lows in April, according to a separate report released Monday.
That survey also showed that investors’ earnings expectations have fallen to their weakest levels since March 2020. is approaching levels seen in other scares, including the collapse of Lehman Brothers in 2008 and the bursting of the dot-com bubble in 2001.
Last week, Deutsche Bank was the first major bank to forecast a recession. The bank expects the Fed to push the economy into a “mild” downturn beginning in late 2023.
cooling off in the labor market
But others believe the Fed may be able to tame inflation without triggering a recession.
To get inflation under control, Goldman Sachs said in a report Monday night that economic growth must slow to a “slightly below trend pace” — enough to persuade companies to shelve some of their expansion plans, but not by much to trigger sharp cuts in current production and employment.”
When demand for labor falls significantly, downturns usually follow. According to Goldman Sachs, there has never been a three-month average increase in the unemployment rate of more than 0.35 percentage points that has not been associated with a recession.
Although the overheated labor market has “significantly increased the risk of recession,” the bank is currently not forecasting a recession in the United States.
Goldman Sachs said its relative optimism stemmed from strong corporate and family balance sheets and its belief that the slowdown in the labor market should be eased by the post-Covid normalization process, which will see more workers come off the sidelines.