The latest jobs report shows that the U.S. labor market is in decent shape, but Bank of America sees trouble looming in the distance.

In September, total nonfarm payroll employment rose by 263,000, beating economists’ expectation of a 250,000 increase. It also means that America’s job growth is heading in the right direction.

Bank of America, however, expects nonfarm payroll gains to be cut in half in Q4 of 2022 and turn negative in 2023. During the first quarter of 2023, the bank projects that the U.S. will be losing roughly 175,000 jobs a month.

And it’s not just the labor market that’s going to take a hit.

“We are looking for a recession to begin in the first half of next year,” Bank of America’s head of U.S. economics Michael Gapen tells CNN.

“The premise is a harder landing rather than a softer one.”

Let’s take a look behind the bearishness.

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Inflation, unemployment, and the Fed

The U.S. Federal Reserve has a dual mandate: to ensure price stability and aim for maximum employment.

The first task has been a challenge: prices have been anything but stable. In June, U.S. consumer price index saw its biggest 12-month increase in 40 years. While the headline CPI number has cooled off from its peak recently — September’s inflation rate was 8.2% year-over-year — it’s still worryingly high.

The labor market — the Fed’s second task — seems to be in much better shape. In September, the unemployment rate fell to 3.5%, a multidecade low.

Given this labor market strength and rampant inflation, the Fed is raising interest rates aggressively to bring price levels under control. The central bank increased its benchmark interest rates by 75 basis points last month, marking the third such hike in a row.

Gapen expects the Fed to remain hawkish.