Goldman Sachs has reduced the odds of a recession in the US from 20% to 15% as analysts at the Wall Street investment bank cite lower rates of inflation and a stubbornly resilient job market that make it more likely the Federal Reserve won’t raise interest rates any further.
While inflation has cooled, American families continue to be squeezed by the rate of price increases, which have exacerbated credit card and car loan defaults.
A recent survey also found that some 61% of Americans said they were living paycheck to paycheck.
While the Consumer Price Index has cooled somewhat, the Federal Reserve’s preferred measure, the Personal Consumption Expenditures price index, rose 3.3% over one year earlier in July, up from June’s 3%.
Goldman Sachs Chief Economist Jan Hatzius predicted that “real disposable income looks set to reaccelerate in 2024 on the back of continue solid job growth and rising real wages.”
“Second, we still strongly disagree with the notion that a growing drag from the ‘long and variable lags’ of monetary policy will push the economy toward recession,” Hatzius wrote.
Hatzius also noted the drag from monetary policy tightening will continue to diminish before “vanishing entirely” by early 2024.
Goldman’s analysis is wildly optimistic compared to other experts.
Reuters polls of economists over the past year showed the risk of a recession one year out rising from 25% in April 2022, the month after the first rate hike of the Fed’s current tightening cycle, to 65% in October.
The most recent read: 55%.
Fed analysts predicted in December that a recession was a “plausible” outcome.
In March, Fed staffers believed that an economic contraction was possible as early as this year.
In May and June, the Fed staff projections “continued to assume” the US economy would be in recession by the end of the year.
Goldman is also more optimistic than its peers about the rate of growth in the US economy.
By the third quarter of last year, growth had rebounded to a 3.2% annual rate, and has remained at 2% or above since then, higher than the 1.8% the Fed considers as the economy’s underlying potential.
The bank is predicting that the economy will continue to grow at an average pace of 2% through the end of next year.
As a result, Hatzius wrote that a move by the Fed to raise interest rates later this month was “off the table” and that a hurdle for a rate hike in November was “significant.”
“On net, our confidence that the Fed is done raising rates has grown in the past month,” he wrote.
“That said, Fed officials are unlikely to move quickly toward easier policy unless growth slows more than we are forecasting in coming quarters,” Hatzius added.
“We therefore expect only very gradual cuts of 25-bps per quarter starting in 2024Q2.”
With Post wires
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