Commuters are pictured September 19 at Addison Station in Chicago. The US economy will soon start shedding 175,000 jobs a month, Bank of America warned Monday. (Kiichiro Sato, Associated Press)
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WASHINGTON – The Federal Reserve’s fight against inflation will cause the US economy to lose tens of thousands of jobs a month starting early next year, Bank of America has warned.
Although the job market remained surprisingly strong in September, the Fed is working hard to change that, aggressively raising interest rates to dampen demand for everything from cars and homes to appliances.
The pace of job growth is expected to roughly halve in the fourth quarter of this year, Bank of America told clients in a report on Friday.
As pressure mounts from the Fed’s war on inflation, nonfarm payrolls will start shrinking early next year, which would translate into losses of about 175,000 jobs per month in the first quarter, the bank said. Charts released by Bank of America suggest job cuts will continue well into 2023.
“The premise is a harder landing rather than a softer one,” Michael Gapen, head of U.S. economics at Bank of America, said in a phone interview with CNN on Monday.
In a perfect world, the Fed would slow down the job market enough to bring inflation back to healthy levels, but not so much that it resulted in significant and sustained job losses. Bank of America doesn’t think the Fed can pull this off.
“We expect a recession to start in the first half of next year,” Gapen said.
Unemployment will peak at 5.5%, Bank of America says
Last Friday’s jobs report showed that the United States added 263,000 jobs in September even as the job market slowed. The unemployment rate fell to 3.5%, its lowest level since 1969.
But Gapen expects the unemployment rate to rise to about 5% or 5.5% next year. For comparison, the Fed expects the unemployment rate to hit 4.4% next year.
The central bank is raising interest rates at the fastest rate in at least four decades to cool inflation. Fed officials have made it clear that they are in no rush to exit anti-inflation mode to save the economy from a slowdown or even recession.
“They will accept some weakness in labor markets to bring inflation down,” Gapen said.
Fed officials have said interest rates must remain at “restrictive” levels for some time.
Gapen said that while recessions tend to have “rapid pullbacks,” the Fed’s stance on keeping interest rates high for an extended period of time suggests “this might last a little longer.”
“We could see six months of weakness in the labor market,” he said.
“Mild” recession
Some forecasters are more optimistic about the situation in the labor market. The Conference Board said on Monday that its Employment Trends Index, a combination of leading labor market indicators, rose last month.
Although no one wants to be callous when someone loses their job, this could be classified as a mild recession.
–Michael Gapen, head of US economics, Bank of America
The Conference Board said this was a signal that “employment will continue to grow in the months ahead,” although job gains are likely to “slow down from their recent pace.”
The good news is that even those calling for a recession don’t see the unemployment rate soaring like it did in 2020 or 2008.
Bank of America expects the unemployment rate to come in at 5.5% next year, well below the nearly 15% peak in April 2020.
“Although nobody wants to be callous when someone loses their job,” Gapen said, “this could be classified as a mild recession.”
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