Goldman Sachs said this week that it’s cutting the probability of a U.S. recession in the next 12 months from 25% to 20%. The firm also immediately conceded that this shows a huge gush of optimism not necessarily shared by other economists, noting that 54% of the median forecasts in a Wall Street Journal survey are saying that the economy is going to undergo the dreaded “R” word in the next 12 months.
One of Goldman’s economists discussed that optimism in a webinar this morning, saying that resilient GDP growth, strong employment and rebounding consumer sentiment were the reasons the firm is upbeat.
Jan Hatzius, chief economist and head of global investment research at Goldman, said that the firm is still steadfast in the “soft-landing camp.”
“We’re going through a period of below trend growth, which is very necessary to unwind some of the imbalances that we had coming out of Covid and the immediate post-Covid period,” Hatzius said. “But I would note that layoffs … are still very low. Claims have been in the roughly 240,000 per week range. Which is somewhat higher that what you had last year or the year before. … But that’s still consistent with quite a strong labor market.”
The second piece of evidence for resilience is a rebound in real disposable personal income growth, Hatzius said. “Real disposable income growth is now growing about 4% on a year-on-year basis, which is quite strong," he said. "Admittedly, a decent chunk of that is income that benefits mainly higher-income earners because of lower capital gains taxes. … Last year, capital gains were very low, so this year’s capital gains taxes are very low. But even if you strip that out and look at real wage and salary income, they’re now solidly in positive territory after having seen a negative numbers for much of 2022.”
Hatzius has also said that 500 basis points of Fed rate hikes, and possibly more to come, have been less of a drag on growth. “You can see that most easily in the housing sector,” Hatzius said. “Housing is where monetary policy really has its impact. And the housing downturn, the housing slowdown that you had in late 2022 has gradually waned.” Altogether, the fact that the growth is unspectacular means it’s beneath its potential.
He acknowledged that a widely held opinion is that the U.S. has to endure a recession to cleanse the economy of inflation. But Hatzius said that inflation has already been tamed without a stark business cycle contraction.
“Headline CPI inflation, the Consumer Price Index, all items, was running at 9% a year ago. It’s running at 3% now. And even if you look at core inflation, it was 6.5% a year ago in the CPI. It’s now a little under 5%.”
He said you can look at certain sectors of the economy for signs that the brakes are working and inflation is slowing down: “Used cars had an outsized impact on inflation. We’re almost certainly going to see some sizable decline in coming months. We’re also certainly going to see some sizable declines in rent inflation over the next six months or so because the Consumer Price Index for rents is basically a lagging indicator of market measures that we already know.”
Goldman’s report, released ahead of the webinar, is called “Global Views: The Narrative Turns.”
The report, written by Hatzius, said, “We do expect some deceleration in the next couple of quarters, mostly because of sequentially slower real disposable personal income growth—especially when adjusted for the resumption of student debt payments in October—and a drag from reduced bank lending. But the easing in financial conditions, the rebound in the housing market, and the ongoing boom in factory building all suggest that the U.S. economy will continue to grow, albeit at a below-trend pace.”