According to Bank of America, the US faces a one-in-three chance of falling into a recession next year.
The bank's economists said that the risks of a recession are low for this year, and that they expect a "bumpy landing" as the Federal Reserve tightens financial conditions.
They are becoming more worried about the future of the US economy because of inflation and the labor market looking to be overheating.
The Federal Reserve is planning a series of interest rate increases to fight inflation in the US, which is running at 40-year highs. There is concern that the central bank could tip the economy into a recession.
BofA economists said in a note Friday that risks are low this year as the economy has plenty of momentum and it will take time for Fed hikes to impact growth.
The Fed will be facing some tough choices next year. There is a chance that a recession will start next year.
In May, the central bank raised interest rates by 50 basis points, the biggest increase in 22 years, and signaled that similar hikes would follow.
According to BofA, there will be an ongoing slowdown in the economy as the Fed raises interest rates. They think growth will fall to 0.4% by the last quarter of the year.
We expect the Fed to hike by about 30 bps more than what is priced into the market, which will add a bit more pressure to financial markets.
The lag from financial tightening to weaker growth is likely to be a bit longer than normal, causing gradual downward pressure on growth.
The US stock market has suffered a string of weekly losses as investors worry about the risk of a recession. According to CNN's Fear and Greed index, sentiment has dropped to extreme fear levels as business leaders warn of the dangers of growth.
Jeremy Grantham, a market historian, has predicted that stocks could fall as much as 80% from their peaks in a coming recession, though he believes the market is pricing in too much risk.
BofA said that if the economy falls into a recession, it will be mild by historic standards.
There are three reasons why the US could avoid a recession. The economy has only one big problem, an overheating labor market.
The US unemployment rate was 3.6% in April, and businesses struggled to hire staff, with many Americans still looking for work. The rate is expected to fall to 3.2% next year.
Employers have to pay higher wages in order to fill labor shortages.
BofA says that the Fed will have to push the unemployment rate up in the next two years. The baseline case calls for a 1% rise or 2% in a recession.
They said that workers returning to the job market will help raise the unemployment rate.
The third reason is that they think the Fed will stop hiking rates once the unemployment rate starts rising and underlying inflation starts falling, rather than the 2% target.
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