Goldman Sachs Revises Recession Odds: Goldman Sachs, in its latest update, has reduced the likelihood of a recession in the United States over the next year to 15%, marking the third consecutive reduction in as many months. In a report titled “Soft landing summer,” Goldman Sachs’ chief economist, Jan Hatzius, cited positive inflation and labor market indicators as the basis for this revision, down from their earlier estimate of 20%.
Diverging from Consensus: This forecast from Goldman Sachs significantly contrasts with Bloomberg’s consensus, which suggests a 60% chance of a recession within the next 12 months. Despite the stronger-than-expected economic data observed during the summer, Hatzius and Goldman Sachs maintain their projection that the U.S. economy will grow at an average annual pace of 2% through the end of 2024.
Labor Market’s Role: Hatzius emphasized that underlying trends in the labor market could play a vital role in sustaining economic growth. While recent monthly jobs reports indicated a cooling labor market, the U.S. economy continues to add jobs, and wages are on the rise—both factors positively influencing growth prospects. The most recent August jobs report showed an addition of 187,000 jobs, accompanied by a 4.3% increase in average hourly earnings. Additionally, the unemployment rate rose to 3.8%, its highest level in 18 months. Hatzius noted that this uptick is mainly due to more individuals rejoining the labor force, which could potentially bolster consumer spending, ultimately supporting the U.S. economy in avoiding a recession.
Debate on Economic Trajectory: Goldman Sachs’ outlook aligns with other institutions such as Bank of America and several economists who either predict no recession in the coming year or see significantly reduced odds. They believe the U.S. economy is entering a phase of “unspectacular growth.” Conversely, those who anticipate a recession point to the lingering effects of the Federal Reserve’s historically aggressive interest rate hikes and the potential dampening impact of further rate hikes on economic growth. Various factors, including tightening lending standards, previous monetary policy tightening, expected fiscal policy effects, and inventory fluctuations, are cited as potential drags on the economy. Nonetheless, Goldman Sachs disagrees with the notion that long and variable lags in monetary policy will stifle economic growth. They anticipate a temporary slowdown due to the resumption of student loan payments in October, and they believe that other headwinds from monetary policy will gradually wane. Furthermore, Goldman Sachs anticipates that the Federal Reserve has concluded its interest rate hikes, with Chair Powell signaling a cautious approach in his recent statements.