BANK OF AMERICA: The US economic recovery will come in 'fits and starts' and feel like we're still stuck in recession

• The US economic recovery won't adhere to a letter-shaped trend, and will instead arrive in three phases, Bank of America economists said Friday.
• The nation is in the middle of the second, or transitionary, phase after the initial shutdown period.
• The final phase will arrive in the third quarter of 2020 and feel "like a recession" as bankruptcies and consumer concerns fuel economic turbulence, the firm said.
• The last stage of the downturn will be "the most uncertain" and challenging, the bank added.
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The US economic rebound will come in three phases, Bank of America projected on Friday, and the worst has yet to come.

The firm's economists are straying from assigning a letter shape to the recovery's trajectory, breaking away from peers' V-, U-, W-, and L-shaped estimates. The US sits firmly in the second phase of recovery, having already staged an initial shutdown and now enduring a prolonged transition. The third phase will be "the most uncertain" and feel "like a recession," Bank of America said.

"After the initial bounce from the bottom upon reopening, the economy needs to find a sounder footing to progress further," the team led by Michelle Meyer wrote. "We think the risk is that it plateaus thereafter for a period of time, entering a recovery period of fits and starts."

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The team doesn't expect a re-enacting of strict quarantine orders, and instead foresees a looser form of social distancing staying in place until a vaccine comes to market. Such a treatment could take at least two years to develop, Bank of America said, and financial tightening among consumers will fuel a turbulent upswing.

Widespread bankruptcies will also curtail a swift rebound. The current credit cycle will be at least as dire as past recessions, the bank's high-yield bond strategist said, implying a default rate of 21%. Small businesses will face the biggest hits, as will industries particularly exposed to coronavirus fallout, the team wrote. Aftershocks are likely to crop up in the commercial real estate sector and drive additional job loss. Should bankruptcies compound, the economy could plunge into an "adverse feedback loop," the team wrote.

Bank of America sees the economy turning to the third phase in the third quarter of 2020, with unemployment dropping from its peak and reopenings spreading further throughout the nation. Additional fiscal stimulus is likely necessary to stage such a transition, as is an extension of the Payroll Protection Program, according to the firm. Even the Federal Reserve will act further to ease lending conditions and spur activity amid the dramatically weakened backdrop.

"The downturn was painful and abrupt," the economists wrote. "There are now signs of life in the economy upon reopening. But the last stage of the cycle — the true recovery — will be challenging."