Goodbye stagflation: 3 reasons BofA sees the US economy avoiding a worst-case scenario
That's according to analysts at Bank of America, who said they believe the US economy could be more on track for a cyclical boom rather than an episode of stagflation, a nightmare situation in which inflation rises while economic growth slows.
Stagflation is commonly thought of as even worse than a typical recession, as policymakers are prevented from cutting interest rates to boost the economy.
For a while, that scenario was one of the biggest fears on investors' minds as they weighed the impact of Donald Trump's "Liberation Day" tariffs.
But strategists said they think the economy is now leaning away from such a situation, even as many global fund managers surveyed by the bank said in June that they thought the global economy would slip into stagflation over the next 12 months.
"The latest fund manager survey shows a small increase in investors expecting a Boom rather than the base case of Stagflation," analysts wrote, defining a "boom" as above-trend economic growth and above-trend inflation.
"We agree with this building minority, and present below corroboration from our quantitative work," they added.
Here are three reasons the bank sees stagflation risk fading.
1. Trump's pro-growth agenda
President Donald Trump's America-first economic agenda is expected to act as a tailwind to the US economy, BofA strategists said.
The bank pointed to stimulus measures included in Trump's "Big Beautiful Bill," as well as the push to boost activity in US manufacturing.
"Moreover, with mid-term elections a few quarters away, it behooves the current administration to implement pro-growth policy now," the bank's strategists added.
2. Big spending
Companies and the public sector are spending big on artificial intelligence, infrastructure, and manufacturing, BofA said.
For AI in particular, analysts said they were expecting $700 billion in capex from the so-called hyperscalers through 2025 and 2026, with "upward revisions each quarter."
"The number of companies outside of the US planning to expand manufacturing capacity in the US continues to increase. Municipalities have also refocused on infrastructure with aged capital stock fraying as domestic activity increases," they added.
3. Economic recovery mode
Bank of America's US Regime Indicator, a gauge for where the US currently is in the business cycle, looks to be "on the brink" of an economic recovery, analysts said.
The US Regime Indicator ticked lower in June, which indicates that the economy is still in a "downturn" phase. Downturn phases are typically followed by economic recovery phases, the bank suggested.
The US Regime Indicator saw six inputs from the economy improve last month, strategists noted, which also suggests that the economy could soon be on the uptrend. Here were the six positive changes analysts saw:
Earnings per share revisions. Earnings revision breadth bottomed out around -25% in April, according to Morgan Stanley data. Since then, it's improved to -5%, the bank said in a June note, implying that the market is growing more optimistic on corporate earnings.
GDP forecasts. Despite a contraction in the first quarter, real GDP was projected to expand 2.8% year-over-year in the second-quarter, according to advanced estimates from the Commerce Department.
Manufacturing strength. The Institute for Supply Management's Production Index, one measure of activity in manufacturing, rose to 50.3 in June, which signals that production moved into expansionary territory.
Leading Economic Indicators. A collection of economic indicators showed signs of improvement on a year-over-year basis, BofA said.
Capacity Utility. The use of "installed productive capacity" in the goods and services sector also improved on a year-over-year basis, strategists added.
High-yield credit spreads. Credit spreads—which is the yield paid over a benchmark—have narrowed, which signals higher investor confidence and lower levels of financial stress among companies.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
8 minutes ago
- Yahoo
Trump hopes China will quickly quadruple its US soybean orders
By Ella Cao, Lewis Jackson and Chandni Shah (Reuters) -U.S. President Donald Trump said on Sunday that he hoped China would quadruple its soybean orders from the U.S, adding that it was also "a way of substantially reducing" Beijing's trade deficit with Washington. "China is worried about its shortage of soybeans. Our great farmers produce the most robust soybeans. I hope China will quickly quadruple its soybean orders. This is also a way of substantially reducing China's Trade Deficit with the USA. Rapid service will be provided. Thank you President XI," Trump said on Truth Social. A tariff truce between Beijing and Washington is set to expire on August 12, but the Trump administration has hinted that the deadline may be extended. China, which takes more than 60% of soybeans shipped worldwide, buys the oilseed mainly from Brazil and the United States. The most active soybean contract on the Chicago Board of Trade (CBOT) was up 2.13% at $10.08 a bushel at 0446 GMT, having been little changed before Trump's post. China imported roughly 105 million metric tons of soybeans last year, just under a quarter coming from the U.S. and the remainder from Brazil. Quadrupling shipments would require China to import the bulk of its soybeans from the U.S. "It's highly unlikely that China would ever buy four times its usual volume of soybeans from the U.S.," Johnny Xiang, founder of Beijing-based AgRadar Consulting, said. It is unclear if securing China's agreement to buy more U.S. soybeans is a condition for extending the trade truce. China's Ministry of Commerce did not immediately respond to a Reuters request for comment. The country has steadily reduced its reliance on U.S. soybeans in recent years, shifting more purchases to South America. Under the Phase One trade deal signed during Trump's first term, China agreed to boost purchases of U.S. agricultural products, including soybeans. However, Beijing ultimately fell far short of meeting those targets. This year, amid Washington–Beijing trade tensions, it has yet to buy any fourth quarter U.S. beans, fuelling concerns as the U.S. harvest export season approaches. "On Beijing's side, there have been quite a few signals that China is prepared to forego U.S. soybeans altogether this year, including booking those test cargoes of soymeal from Argentina," said Even Rogers Pay, an agricultural analyst at Trivium China. Reuters previously reported that Chinese feedmakers have purchased three Argentine soymeal cargoes as they aim to secure cheaper South American supplies amid concerns about a possible soybean supply disruption in the fourth quarter. U.S. soybean industry has been seeking alternative buyers, but no other country matches China's scale. Last year, China imported 22.13 million tons of soybeans from the U.S., and 74.65 million tons from Brazil. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Business Insider
10 minutes ago
- Business Insider
Mark Cuban says the US has got to keep investing in research if it wants to have a chance of beating China at AI
"Shark Tank" star Mark Cuban says the US can beat China at AI if it continues "investing in research of all kinds as a country." "The IP we create domestically is what the frontier models can buy or invest in to define their differentiation and advance forward," Cuban wrote on X in response to a post by David Sacks, the White House's AI and crypto czar, on the state of the AI race. When asked about his X post, Cuban told Business Insider that American research is "important, not just because of the outcome of the research itself, but its value to American frontier AI models" like ChatGPT and Gemini. Cuban said that any unique intellectual property produced can be "licensed to the models, for a fee, to be included in their training." This would not only offset research costs but also make the models more valuable, he added. "The quality and depth of the research we do in this country can help us stay ahead of China and other countries in the AI race," Cuban told Business Insider. "We need our Ph.D.s, our scientists, our experts, to stay here and contribute to society, and their IP to make American AI models the global leaders," he added. Since taking office in January, President Donald Trump's administration has been culling research grants for universities and research institutions like the National Institutes of Health (NIH). Please help BI improve our Business, Tech, and Innovation coverage by sharing a bit about your role — it will help us tailor content that matters most to people like you. What is your job title? (1 of 2) Entry level position Project manager Management Senior management Executive management Student Self-employed Retired Other Continue By providing this information, you agree that Business Insider may use this data to improve your site experience and for targeted advertising. By continuing you agree that you accept the Terms of Service and Privacy Policy . Researchers and scientists told Business Insider's Ayelet Sheffey in April that the cuts could stifle innovation and result in brain drain. "It absolutely endangers the United States' position as the global leader in medical research. And for that, we will pay," Peter Lurie, a recipient of an NIH grant terminated in March, told Sheffey. Staying ahead in the AI race has been a primary focus for the Trump administration, which unveiled its " AI Action Plan" last month. The 28-page plan calls for a light-touch approach to AI regulation compared to Trump's predecessor, President Joe Biden. In January, Chinese AI startup DeepSeek shocked the world with its high-performing but relatively cheap AI models. Trump said he viewed DeepSeek's accomplishment "as a positive, as an asset" for America. "The release of DeepSeek, AI from a Chinese company, should be a wake-up call for our industries that we need to be laser-focused on competing to win," Trump told GOP lawmakers in January.
Bloomberg
10 minutes ago
- Bloomberg
Nvidia China Chip Payments, Tax Hike Hurts Jobs, Private Credit's Losers
Your morning briefing, the business news you need in just 15 minutes. On today's podcast: (1) Nvidia and Advanced Micro Devices agreed to pay 15% of their revenues from Chinese AI chip sales to the US government in a deal to secure export licenses, an unusual arrangement that may unnerve both US companies and Beijing. (2) European nations are seeking to talk to Donald Trump ahead of the US president's planned meeting in Alaska with Russian leader Vladimir Putin, according to people familiar with the matter. (3) Israeli Prime Minister Benjamin Netanyahu defended his plan for a military sweep against the final Hamas strongholds in Gaza, calling it the best available option for recovering hostages while safeguarding his country's long-term security — an argument that's met vocal opposition at home and abroad. (4) It was a 'trailblazing' project - and for the two small pension funds that helped finance it, a chance to prop up the retirement savings of dentists and pharmacists in rural northern Germany. We look at Germany's biggest property crash since the financial crisis. (5) The UK jobs market weakened across the board in July as employers cut their payroll budgets in response to Chancellor of the Exchequer Rachel Reeves' £26 billion ($34.9 billion) tax increase, according to a survey closely monitored by the Bank of England. (6) European Central Bank officials will wait until December to deliver their next interest-rate cut in what is likely to be the final move in the cycle, a Bloomberg survey showed.
