Bank of America Securities: Three Reasons for Different Views on the U.S. Economy

According to the Zhitong Finance APP, Bank of America Securities released a research report stating that the interest rate cut cycle is expected to be delayed, and there will be no rate cuts this year. Although the growth forecast has been lowered, no recession is predicted. Data shows that the service industry contributes 66% of consumer spending and 83% of employment in the U.S., significantly weakening the transmission effect of tariffs on the real economy. At the same time, the healthy state of household balance sheets (the ratio of liquid assets to liabilities is at a historical high) supports consumer resilience. Notably, Bank of America emphasizes that the current 40% tariff level on China is close to its post-election expected threshold, and the advancement of fiscal stimulus measures may create new growth points. Despite lowering the GDP growth forecast for 2025 to 1% (year-on-year in Q4), the bank still maintains the core judgment of "slowing but not recession."

The main points of Bank of America Securities are as follows:

Bank of America believes that the U.S. economy's potential resilience to tariffs is stronger than the market perceives.

Even before an agreement was reached between the U.S. and China, Bank of America expected the economy to slow rather than enter a recession. Despite the significant increase in tariffs in early April, Bank of America remained relatively optimistic, as it anticipated that trade tensions would ease and fiscal policy would loosen. Although the "Trump put option" seems to have been triggered, the execution price of the "Federal Reserve put option" is much lower. Bank of America still expects the interest rate cut cycle to be delayed, with no rate cuts this year.

Following the tariff announcement on April 2 and the subsequent escalation of U.S.-China trade tensions, the market reflected dynamics similar to a recession. The Nasdaq entered a bear market (with the S&P 500 index nearing bear market territory), and front-end Treasury yield pricing indicated that the peak rate cut by the Federal Reserve would exceed 100 basis points. The delay of reciprocal tariffs on April 9 only partially reversed these trends. However, Bank of America insists that the Federal Reserve will not cut rates this year. Although the bank has lowered its growth forecast, it does not predict a recession. Here are three reasons why Bank of America still holds a non-consensus view now and in the past.

1. Economic Resilience

Bank of America believes that tariffs after April will not lead to a recession. The U.S. economy entered this period of policy turmoil with considerable momentum. Economic growth is above trend levels, and productivity shows signs of sustained acceleration. Moreover, the U.S. is a service-driven economy: about two-thirds of consumer spending and four-fifths of jobs are concentrated in the service sector, most of which are not significantly affected by tariffs. Bank of America believes that the service industry can continue to provide sufficient wage and employment growth to support consumer demand.

Chart 1: Overall health of household balance sheets remains robust

Additionally, the inflation shock that American consumers faced in 2022 was much greater than the tariff impact anticipated by Bank of America. Admittedly, the labor market was tighter at that time, and wage inflation was higher. However, in Bank of America's view, one underestimated reason for consumer resilience is the overall health of household balance sheets. The high ratio of assets (including liquid assets) to liabilities allows consumers to draw on savings during periods of soaring inflation Currently, the balance sheet remains strong, so Bank of America believes that if inflation rebounds, consumers still have a substantial buffer.

Bank of America's biggest concern about the macro outlook is that policy uncertainty will freeze capital expenditures. In fact, Bank of America's forecasts indicate that capital expenditures will decline significantly over the next two quarters. However, Bank of America's baseline scenario is that this uncertainty shock, combined with the direct impact of tariffs, will lead to an economic slowdown rather than a recession. This is mainly because the Trump administration has an incentive to avoid a recession. This leads to Bank of America's second point.

II. Trump’s Put Option

Some members of the government have suggested that a recession is needed to "reset" the economy. Bank of America does not interpret these statements literally but views them through the lens of game theory: the government is implying that it has a higher "pain threshold" in trade negotiations to enhance its bargaining power.

Bank of America believes that easing trade tensions will help avoid a recession for the following reasons: (i) reducing stagflation risks; (ii) alleviating uncertainty shocks. Although the timing of the U.S.-China agreement was earlier than Bank of America expected and the reduction in bilateral tariffs was larger than anticipated, Bank of America believes its viewpoint has been validated after the agreement was reached.

Bank of America believes that the tariff easing that began on April 9 is at least partly a response to market turmoil. In other words, the execution price of the "Trump put option" is higher than market expectations. Interestingly, the current level of 40% Chinese tariffs (temporarily) is exactly at the level Bank of America expected post-election.

The new tariff regime increases the risk of further front-loading consumption. Retailers may take advantage of the 90-day suspension period on Chinese tariffs to stockpile holiday goods. This means that starting this month, imports may surge again and continue until June or longer. In turn, the quarterly GDP profile will change, with inventory and capital expenditures in the second quarter being stronger than Bank of America previously expected, while the decline in front-loading consumption will be delayed until the second half of the year. Contrary to the widely feared scenario of empty shelves, Bank of America may see warehouse backlogs in the coming months. However, after excluding these disruptions, Bank of America remains confident in its forecast of 1% year-on-year growth for the full year of 2025.

Another major pillar of the Trump agenda is fiscal policy (Chart 3). The tax bill is taking shape. As Bank of America anticipated, the bill seems likely to provide upfront stimulus for consumers and businesses. In Bank of America's forecast, it plays two important roles. First, it will boost capital expenditures starting in the fourth quarter, thereby promoting GDP growth. Second, expectations for the bill help to curb layoffs and unemployment rates, thus helping the economy avoid a recession in the second to third quarters. Although businesses may be reluctant to deploy capital due to policy uncertainty, Bank of America also believes that when companies know that fiscal stimulus (and the subsequent rebound in final demand) is on the way, they are less likely to choose large-scale layoffs The progress of the fiscal bill seems to be driven by the "policy put option." Statements from government members indicate a sense of urgency to offset the downward impact of tariffs through tax cuts.

Chart 3: If the House proposal becomes a permanent policy, the deficit as a percentage of GDP will be higher than if only the expiring TCJA provisions are extended.

(Primary deficit as a percentage of GDP)

III. Delayed Fed Rate Cuts

Since January, Bank of America has predicted that the Federal Reserve will not cut rates this year. Part of the reason is Bank of America's assessment of the economy's fundamental health, as well as indications from the Trump administration that a recession is unlikely, as mentioned earlier. However, Bank of America also believes that the market's view of the Fed's reaction function is overly dovish.

Bank of America argues that when (i) the risks to the Fed's two mandates (employment and inflation) are in opposite directions, and (ii) inflation is above target, the Fed cannot afford the consequences of preemptive rate cuts. Chairman Powell mentioned the latter in the May press conference. Additionally, considering the upside risks from fiscal policy, Powell and other officials have indicated that the Fed will respond to the net effects of all policy changes, not just trade policy. They have also reused the language that Powell frequently employed during the 2022-2023 rate hike cycle: without price stability, sustainable full employment is not possible. All of this sounds quite hawkish.

Therefore, Bank of America still believes that the Fed will remain patient in the short term. To cut rates, the Fed needs to see clear evidence that either the labor market has significantly deteriorated or inflation has begun to decline after the impact of tariffs fades. Neither of these outcomes seems to be close yet. However, if the Fed does cut rates, the risk is that it may act quickly, as it may already be behind the curve.

The market has aligned more closely with Bank of America's view but still expects a 55 basis point rate cut this year and about a 45 basis point cut next year. This is very close to the dot plot from March (50 basis points per year). Bank of America's predicted final outcome is the same—100 basis points cut by the end of 2026—but the path is entirely different, with all cuts concentrated in the second half of 2026 (Chart 4).

Chart 4: Bank of America's predicted rate cut cycle is much later than market pricing.

Effective Federal Funds Rate (%)

U.S. GDP Tracking

The initial forecast for second-quarter GDP tracking is 2.2%, with the first quarter revised up by 0.1 percentage points to -0.3%.

After the release of April retail sales data, Bank of America initiated its second-quarter GDP tracking forecast, raising it by 0.2 percentage points from its official forecast of a quarter-over-quarter annualized growth rate of 2.0% to 2.2%. Meanwhile, since Bank of America's last weekly report, it has revised its first-quarter GDP tracking forecast up by 0.1 percentage points to a quarter-over-quarter annualized decline of 0.3%. Below are the details of the changes in Bank of America's tracking forecast.

The retail sales core control group data included in the GDP tracking forecast showed a month-over-month decline of 0.2% in April, better than Bank of America's expectation (a decline of 0.5%). This was accompanied by a net downward revision of data from the past two months. However, food services (not directly included in the tracking forecast but should be reflected in the final GDP data) were revised up in March and performed strongly in April. This led Bank of America to raise its personal consumption expenditures (PCE) forecasts for both the first and second quarters. March's business inventories were slightly below expectations, resulting in a slight decrease in Bank of America's first-quarter inventory forecast.

In the April industrial production (IP) report, utilities performed better than expected, while mining and commercial equipment underperformed. This led to an increase in Bank of America's second-quarter PCE tracking forecast, while also causing a decrease in its tracking forecast for second-quarter construction and equipment.

Next week, April housing data will impact the GDP tracking forecasts for the first and second quarters.

Chart 5: The second-quarter GDP tracking forecast was raised by 0.2 percentage points from Bank of America's official forecast of 2.0% to 2.2%. The first quarter was revised down by 0.1 percentage points to -0.3%.

Bank of America U.S. GDP Tracking Forecast (Quarter-over-quarter annualized growth rate %)