The SPDR S&P 500 ETF Trust (NYSE:SPY) has taken a big hit so far in 2022. Negative U.S. GDP growth in the first quarter has investors increasingly spooked that inflation and aggressive Federal Reserve tightening could push the economy into a recession.
Bank of America economist Aditya Bhave said this week that, despite the market volatility, the firm's machine learning tools suggest the U.S. economy is still booming.
Economy Still Booming? Bank of America applies machine learning technology to more than 120 pieces of monthly economic data to determine what stage of the business cycle the economy is in.
Through March 2022, the firm's economic cycle indicator suggested the economy was still in the "boom" phase.
Bhave said the latest reading is consistent with his belief that the 1.4% drop in U.S. GDP in the first quarter was merely an outlier. He said key underlying economic metrics, such as consumer spending, residential investment and nonresidential fixed investment have all grown significantly since summer of 2021.
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Recession Risk Low: While real goods consumption has been declining, Bhave said consumer spending and services have picked up the slack in recent months.
"In summary, our big data analysis underscores our view that recession risks are low at the moment. But we remain much more concerned about 2023," he said.
The cumulative impact of Federal Reserve rate hikes will start to seriously weigh on parts of the economy by the beginning of next year, Bhave said. Bank of America is forecasting the Fed will reach its terminal target interest rate range of between 3.25% and 3.5% in May 2023, but Bhave said there's a real risk the Fed will be forced to raise rates significantly higher to bring inflation under control.
Benzinga's Take: Bank of America's data suggests there is no reason for investors to sound the alarm bells on the U.S. economy just yet.
Each month of elevated inflation and each subsequent Federal Reserve interest rate hike raises the probability of a recession coming at some point by the end of 2023.
