Bank of America Reverses Recession Call, but Warns of ‘Very Negative’ Consumer Spending Risk

Traders work on the floor of the New York Stock Exchange in New York City on Aug. 2, 2024. Michael M. Santiago/Getty Images

Bank of America CEO Brian Moynihan said that the financial giant no longer believes that the U.S. economy will fall into a recession, although he warned that the current slowdown in consumer spending could worsen, potentially pushing U.S. shoppers into a “very negative” state that would be difficult to reverse.

Moynihan made the remarks during an Aug. 11 interview on CBS’s “Face the Nation” program, in which he discussed the bank’s outlook for the economy over the next year and a half and urged careful management of interest rate policy by the Federal Reserve to prevent a deeper economic downturn, suggesting that easing rates might be necessary to sustain consumer confidence and spending.

At about the same time last year, Bank of America was predicting that the U.S. economy would enter a recession—although the bank’s analysts have now reversed that call, Moynihan said.

“Basically, they say we go to 2 percent growth, then 1 1/2 percent growth over the next six quarters and kind of bump along at that growth rate, plus or minus,” he said.

Part of what appears to be driving Moynihan’s cautious optimism is data coming from the bank’s base of about 60 million consumers, which he said shows consumer spending grew by about 3 percent year over year in July and August of this year, roughly half the pace of growth in the comparable period last year.

“The consumer has slowed,” he said. “They have money in their accounts, but they’re depleting a little bit. They’re employed, they’re earning money, but if you look at—they’ve really slowed down.”

Moynihan said that the bank’s spending data suggest consumers are increasingly bargain hunting, in another sign that the pace of spending by the U.S. consumer may be faltering.

Unless it eases its high interest rate policy “relatively soon,” the Fed risks denting consumer confidence significantly, Moynihan said.

“Once the American consumer really starts going very negative, then it’s hard to get them back,” he said.

Moynihan also revealed that Bank of America analysts expect the Fed to bring down rates at a slower pace than markets are currently pricing in, adding that he believes the era of near-zero interest rates is gone for good and that the central bank will eventually settle at 3 percent to 3.5 percent, which he called “back to normal.”

Part of what sent inflation to multi-decade highs in recent years was too much stimulus, he said, with massive government enabled by cheap borrowing costs at ultra-low interest rates. In a bid to quash high inflation, the Fed took rates quickly to their current range of 5.25 percent to 5.5 percent and has held them there for about a year.

The Bank of America chief’s cautious optimism about a so-called soft landing contrasts with the outlook of JPMorgan Chase CEO Jamie Dimon, who remains less convinced that the U.S. economy will manage to avoid a recession.

Dimon recently said that ongoing uncertainties—including geopolitical tensions, housing market instability, and high inflation—could derail the economy. He put the odds of avoiding a recession at just 35 percent to 40 percent.

Recession fears made a major comeback in recent weeks following a run of disappointing labor market and manufacturing data that rocked markets. While the markets have since largely regained their footing, many analysts warn of potentially more volatility ahead.

Investors are now eyeing inflation data, which will take center stage this week with the release of the producer price index on Aug. 13 and the consumer price index (CPI) the next day.

Inflation fell quickly from a peak of 9 percent in June 2022 to within a range of 3 percent to 3.7 percent, where it has been over the past year or so, defying Fed efforts to bring it closer to its target of 2 percent.

Investors are predicting that when the government releases its latest CPI data on Aug. 14, it will show that the annual inflation fell to 2.9 percent, breaking the psychological barrier of 3 percent, with the potential that upside or downside misses will be market-moving.