Goldman Sachs cuts the odds of a US recession to 15% as economic optimism grows

New York

Goldman Sachs is increasingly confident that the US economy will stick to the soft landing that many thought was nearly impossible to achieve.

In a research report published Monday night, Goldman Sachs cut its estimated odds of a US recession in the next 12 months to just 15%.

This is basically in line with the historical average chance of a recession in any given year. It is also below the Wall Street bank’s previous forecast of 20% and far below its forecast of 35% in March as the banking crisis unfolded.

The report, titled “The Summer of the Soft Land,” points to a series of encouraging economic indicators on inflation and the labor market that suggest the US economy will avoid the Fed-fueled recession that many fear.

Curbing inflation without sending the economy into recession is what is called a “soft landing,” something the Fed has done only once in the past 60 years.

“We strongly disagree with the notion that further decline resulting from the ‘long and variable lag’ of monetary policy will push the economy into recession,” Jan Hatzios, chief US economist at Goldman Sachs, wrote in the report. “In fact, we believe that the impact of monetary policy tightening will continue to diminish before disappearing completely by early 2024.”

Hatzius added that Goldman Sachs is increasingly confident that the Fed is “done” with raising interest rates as unemployment rises, wages slow and inflation subsides.

Wall Street economists have had to repeatedly delay or even cancel their recession forecasts as the economy proves resilient.

Goldman Sachs says it is “significantly more optimistic” than most forecasters. The consensus of Bloomberg economists still calls for a 60% chance of a recession.

Hatzius writes that GDP trackers such as the Atlanta Fed’s GDP model, which calls for a buoyant 5.6% growth in the third quarter, are likely to “overestimate the true momentum of the economy.” He added that growth is likely to slow in the fourth quarter as student loan payments resume and mortgage rates rise, hurting housing.

“But we expect the slowdown to be shallow and short-lived,” Hatzios said.

Goldman Sachs cited “strong” job growth and higher real (inflation-adjusted) wages, which should allow real disposable income to “accelerate” in the coming year.

In other words, paychecks will grow faster than prices, giving consumers the power to keep spending. This is crucial in an economy where consumer spending is the main driver of growth.

The August jobs report, released late last week, showed that employment remains strong, although it has slowed from the large pace seen earlier in the post-pandemic recovery.

And while the unemployment rate jumped from 3.5% to 3.8% in August, Hatzius said Goldman Sachs is “not interested” in the increase because it is “paid entirely” by the increased supply of people looking for work.

“The August jobs report couldn’t be much better,” said Moody’s Analytics chief economist Mark Zandi Books Friday on X, formerly known as Twitter. “The report has soft landings written all over it.”

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