- Three things are about to turn awry in markets and the economy, Bank of America said.
- The bank’s economists pointed to a crunch in credit conditions and other looming headwinds.
- The US economy is set to tip into a mild recession by the first half of 2024, BofA said.
Though markets and the economy appear to be holding up, there are three things that are about to go wrong and help land the US in a recession this year, according to Bank of America.
The bank’s team of economists said in a note on Friday that recent data have surprised to the upside, pointing to positive trends in home sales as well as auto sales and production.
But, “although these rates-sensitive sectors have outperformed expectations and the broader economy is growing around trend, we still think there are enough pockets of concern that a mild recession, starting in 1H 2024, should be the base case,” the bank added.
1. Credit Crunch
The failure of regional lenders earlier this year amid aggressive Fed tightening has made banks less willing to lend, which spells future trouble for credit markets.
BofA cited the the April Senior Loan Officer Opinion Survey that showed consumer and business loan growth has slowed across most categories, with loan officers warning that credit conditions will likely keep tightening for the rest of the year.
“We also see a risk that additional rate hikes will lead to another bout of regional bank stress, which would cause further credit tightening. This should eventually weigh on investment, employment and spending,” Bank of America economists said.
An earlier report from Morgan Stanley analysts said banks have tightened lending the most they ever have on record.
2. Resuming student loan payments
The Supreme Court shot down President Joe Biden’s student loan forgiveness plan last month, with borrowers now preparing to resume payments on their student debt in the early fall.
After a three-year pause on student loan payments, the resumption is likely to burden consumers, BofA said, which could significant increase the delinquency rate, or the rate of late payments on loans.
The effects of that could also spill over to other areas of the debt market, such as credit card debt, where a rising number of borrowers have already slipped into delinquency.
“Given that lower-income consumers with higher marginal propensities to spend are most likely to be burdened by repayment, we think this could be moderate headwind to growth,” the bank’s economists said.
3. Slowing GDP
Though the labor market has stayed robust despite aggressive Fed tightening, job growth has mostly been concentrated in lower-wage service jobs, which has led to a decline in labor productivity.
“That is probably no a sustainable dynamic. Either GDP will accelerate to justify the hiring that has already happened, payrolls will slow significantly and potentially decline. The latter is our base case and it would be accompanied by a much weaker economy,” strategists warned.
US GDP growth clocked in at an adjusted 2% for the first quarter. Forecasters surveyed by the Philadelphia Fed expect GDP to grow just 1.3% for the year.
Related Post
- Three things are about to turn awry in markets and the economy, Bank of America said.
- The bank’s economists pointed to a crunch in credit conditions and other looming headwinds.
- The US economy is set to tip into a mild recession by the first half of 2024, BofA said.
Though markets and the economy appear to be holding up, there are three things that are about to go wrong and help land the US in a recession this year, according to Bank of America.
The bank’s team of economists said in a note on Friday that recent data have surprised to the upside, pointing to positive trends in home sales as well as auto sales and production.
But, “although these rates-sensitive sectors have outperformed expectations and the broader economy is growing around trend, we still think there are enough pockets of concern that a mild recession, starting in 1H 2024, should be the base case,” the bank added.
1. Credit Crunch
The failure of regional lenders earlier this year amid aggressive Fed tightening has made banks less willing to lend, which spells future trouble for credit markets.
BofA cited the the April Senior Loan Officer Opinion Survey that showed consumer and business loan growth has slowed across most categories, with loan officers warning that credit conditions will likely keep tightening for the rest of the year.
“We also see a risk that additional rate hikes will lead to another bout of regional bank stress, which would cause further credit tightening. This should eventually weigh on investment, employment and spending,” Bank of America economists said.
An earlier report from Morgan Stanley analysts said banks have tightened lending the most they ever have on record.
2. Resuming student loan payments
The Supreme Court shot down President Joe Biden’s student loan forgiveness plan last month, with borrowers now preparing to resume payments on their student debt in the early fall.
After a three-year pause on student loan payments, the resumption is likely to burden consumers, BofA said, which could significant increase the delinquency rate, or the rate of late payments on loans.
The effects of that could also spill over to other areas of the debt market, such as credit card debt, where a rising number of borrowers have already slipped into delinquency.
“Given that lower-income consumers with higher marginal propensities to spend are most likely to be burdened by repayment, we think this could be moderate headwind to growth,” the bank’s economists said.
3. Slowing GDP
Though the labor market has stayed robust despite aggressive Fed tightening, job growth has mostly been concentrated in lower-wage service jobs, which has led to a decline in labor productivity.
“That is probably no a sustainable dynamic. Either GDP will accelerate to justify the hiring that has already happened, payrolls will slow significantly and potentially decline. The latter is our base case and it would be accompanied by a much weaker economy,” strategists warned.
US GDP growth clocked in at an adjusted 2% for the first quarter. Forecasters surveyed by the Philadelphia Fed expect GDP to grow just 1.3% for the year.
