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Goldman Sachs Sees Only Small Chance of Recession

Many experts believe the economic slowdown triggered by the Federal Reserve’s interest-rate increases will turn into a recession. The banking crisis may play a role, too, they say.

But Goldman Sachs doesn’t share that view on recession. “Our U.S. growth forecast for 2023 remains at a well-above-consensus 1.6% and our 12-month recession probability at a well-below-consensus 35%,” Goldman’s chief economist, Jan Hatzius, wrote in a commentary.

The economy expanded 1.1% annualized in the first quarter.

As for the 35% forecast, “we would split the number roughly evenly into:

“the probability that the current banking turmoil — or another near-term shock such as a debt-limit crisis — pushes the economy into recession in the next quarter or two, and“the probability that upside inflation surprises force the Fed to deliver moremonetary tightening that raises recession risk in late 2023/early 2024.” Year-on-year consumer-price inflation totaled 4.9% in April.

“Both outcomes are possible, but neither is likely ,” Hatzius said.

“Interest-rate market participants have been most concerned about the risk that the banking turmoil will trigger a near-term recession,” he said. “But two months after the Silicon Valley Bank failure, the evidence for a big impact remains surprisingly limited.”

Positive Signs for the Economy: Goldman

Second-quarter GDP is on track to grow 1.8% annualized, and job data remain buoyant, he said. Moreover, “the Fed’s April Senior Loan Officers’ survey showed only a modest further increase in the share of banks tightening lending standards,” Hatzius noted.

“And the April National Federation of Independent Business survey showed a surprising decline in the share of small firms reporting that credit was harder to get.

“To be sure, anecdotal evidence and the continued pressure on the stock prices of regional banks suggest that the impact is still building.” 

The KBW Nasdaq Regional Banking stock Index has dropped 15% in the past month.

“So it is premature to revise down our estimate that banking stress will subtract 0.4 percentage point from GDP growth this year,” Hatzius said.

“But the hit would need to be much bigger than 0.4 percentage point to push the economy into recession.” That’s because of the support from other factors, such as the rebound in real income and the stabilization in the housing market.

The Inflation Picture

When it comes to inflation, the news also “remains reasonably encouraging,” Hatzius said. Granted, consumer prices excluding food and energy rose 0.4% month-on-month in April. But “one-third of the increase was due to an outsized (and almost certainly temporary) 4.4% increase in used-car prices,” he explained.

“Smoother measures of underlying inflation … show ongoing, if gradual, progress,” Hatzius said.

“The first-quarter employment cost index and April average hourly earnings both surprised on the high side,” he acknowledged. But “our sequential wage tracker has continued to slow from a peak of 6% in early 2022 to 4.5% in early 2023.”

Bottom line: “At least so far, Fed officials have managed to put the economy on a course of gradual wage and price disinflation without the recession predicted by a large majority of economists,” Hatzius said.

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