Michael Gapen, a senior economist at Bank of America predicts a small recession in the US economy will probably occur later this year.
Gapen claims that in many cases, a mild recession is necessary to address labor market imbalances and bring inflation back to the Federal Reserve‘s 2% target.
According to him, a moderate recession is a little milder than a normal one. He claims that BofA’s prediction, which rounds up to a 1% peak-to-trough GDP loss, is smaller than the 1.5% historical average decrease.
The labor shortage is the main difference between the prospects now and during prior downturns. Due to labor shortages as well, CEOs anticipate a “short and shallow” slump. Demand is predicted to fall across a number of industries this year. There is a significant labor shortage caused by a lack of workers, strict immigration regulations, and an aging working force.
“The bank stress situation isn’t improving much, but it’s also not growing a lot worse either. Under that, he added, the employment and other expenditure figures show a generally robust economy.
Even if interest rates have already risen from near-zero levels to above 5% since early 2022, the US labor market is still strong, which would inspire the Fed to continue its tightening effort.
How Will The Mild Recession Affect The Economy?
The latest current payroll data shows that American firms added 339,000 new positions in May, significantly more than economists had anticipated.
“It’s a challenge since credit prices have gone up and regulations have surely gotten stricter. But I still think that there are good things going on that are keeping the economy expanding and driving the Fed to think that additional action is still needed, Gapen added.
Most Wall Street analysts believe that a recession will hit the US in the approaching year. What does that imply for American workers?
Here is an example of how job losses could compound using peak unemployment forecasts from the Federal Reserve Bank of Atlanta’s Jobs Calculator.
A severe recession has the power to fundamentally disrupt the economy and increase unemployment. A minor recession, however, might only result in a slight rise in unemployment.
Of course, people whose jobs might be removed will not be pleased with it. If unemployment does not dramatically rise, it might be easier for those who leave their jobs to obtain new employment.
A slight drop is unlikely to result in further federal funding from the perspective of the stimulus. In the past, Congress has approved stimulus payments in times of high unemployment. Since a mild recession is unlikely to bring us there, Americans shouldn’t anticipate receiving a windfall in their bank accounts. CEOs consistently state that although a downturn in the American economy is on the way, the job market’s steady resilience will endure. Business executives would generally concentrate on cutting expenses and employment during such uncertain times, but they anticipate that the labor market will continue to be competitive.
Mild Recession Will Affect How CEOs Handle Their Businesses
The epidemic, inflation, quick hikes in interest rates, and a brief banking crisis were just a few of the recent shocks to the economy, but it continues to exhibit signs of resilience. The intricacy of the economy stems from what appears to be cognitive dissonance.
The majority of senior executives globally forecast a U.S. recession during the next 12 to 18 months for the fourth consecutive quarter, according to the CEO ConfidenceIndex published by the Conference Board, where I serve as chief economist. They believe it will be brief, superficial, and have little overall influence. A startling 87% of CEOs anticipate this scenario, according to the survey’s second quarter iteration, while only 6% forecast a severe recession with global spillover, and only 7% predict no recession at all.
Due to the widespread pessimism of CEOs, the total confidence score, which is currently at 43, is only slightly above the lows experienced during the worst of the epidemic. (The Conference Board Measure of CEO Confidence is a quarterly survey of almost 150 CEOs that is conducted in association with The Business Council. A reading below 50 implies that among the participants—who are all members of The Business Council—there were more negative than positive responses to the poll.)
CEOs have previously claimed in quarterly polls that they believe the Fed’s anti-inflationary policies are the main reason behind this mild and temporary slowdown in the U.S. economy.
CEOs have maintained their support for the central bank’s aggressive rate rises this quarter despite clear indications of recession and a lingering banking crisis. In fact, 82% of CEOs believe that the Fed’s monetary policy decisions should take inflation into account. The CEOs evaluated the debt ceiling concern (1%), financial stress (43%), GDP growth (28%), and the tight job market (49%), as being much less significant influences on Fed policy. This point of view makes sense given that common consumer inflation indicators routinely surpass the Fed’s 2% target and the potential for inculcating higher inflation expectations.
The majority of CEOs do not think the current financial crisis will directly or indirectly result in a significant recession. And they appear to be managing it well. When questioned about their alternative crisis management strategies, just 28% of CEOs claimed they were improving their own company’s liquidity, and only 17% said they were altering their banking relationships.
Most CEOs are “examining relationships” rather than “taking drastic measures in order to safeguard themselves from the lingering effects of the crisis.” CEOs examine their relationships with their banks in 62% of cases. Their own risk management in 28% of cases. The liquidity sufficiency of their clients in 33% of cases. And the liquidity sufficiency of their suppliers in 30% of cases.
Three sets of survey results provide evidence in favor of this conclusion: To start, only 20% of CEOs intend to make personnel reductions in the future year. Unexpectedly, 33% believe that recruiting will continue, while a sizable 46% believe that staffing will remain unchanged.
Finally, only 9% of CEOs see no problems with finding competent people, leaving 91% to predict some major issues.