In a surprising turn of events, Goldman Sachs economists, led by Jan Hatzius, have revised their outlook on the U.S. economy, suggesting a reduced likelihood of a recession in the upcoming year. This shift in perspective has been attributed to several key factors that indicate a more optimistic economic landscape than previously anticipated.
Lowered Recession Probability
Goldman Sachs economists have lowered their probability of a recession occurring within the next 12 months from an earlier forecast of 20% to a more optimistic 15%. This significant adjustment in their outlook has been motivated by two primary factors.
Positive Economic Indicators
Firstly, economists point to the expected reacceleration of real disposable income in 2024. This optimism is based on robust job growth and rising real wages, which are anticipated to bolster consumer spending and economic stability.
Secondly, Goldman Sachs strongly disagrees with the notion that the “long and variable lags” of monetary policy will push the economy toward a recession. This perspective challenges the belief that the Federal Reserve’s actions will inevitably lead to a downturn.
Fed’s Monetary Policy
Furthermore, the Goldman Sachs economist, Hatzius, believes that the Federal Reserve has reached its peak in raising interest rates. As unemployment rates rise, wage growth slows, and core inflation moderates, there is a growing confidence that the Fed will halt further rate hikes. However, this decision will be contingent on economic growth in the coming quarters, with any rate cuts expected to be gradual and commencing in the second quarter of 2024.
Optimism Amidst Divergence
It is important to note that Goldman Sachs’ outlook stands in stark contrast to many other forecasts, including a Bloomberg consensus that predicts a higher likelihood of a recession at 60%. This divergence in opinions underscores the complexity of economic forecasting in the current climate.
Inflation and Monetary Policy
The analyst note also references recent economic data, such as the consumer price index (CPI), which measures the cost of everyday goods. In July, the CPI rose by just 0.2%, with an annual increase of 3.2%. This marks the first acceleration in a year and highlights the ongoing challenge of managing high inflation.
Despite the Federal Reserve’s aggressive efforts to combat inflation through interest rate hikes, core prices, which exclude volatile elements like food and energy, have risen by 0.2% monthly and 4.7% annually. This level is significantly higher than the pre-pandemic average.
Federal Reserve’s Aggressive Approach
In response to rising inflation, Fed policymakers have approved 11 rate hikes over the past year, resulting in interest rates surging from near zero to above 5%. This pace of tightening is the fastest seen since the 1980s. While officials have hinted at the possibility of additional rate hikes, they are cautious and will require substantial evidence of inflation receding before making any further moves.
Hatzius emphasized that a rate increase in September is now “off the table,” and the threshold for a November hike is considered “significant.”
Impact of Interest Rates
The increase in interest rates typically leads to higher borrowing costs for consumers and businesses, which can, in turn, slow down economic activity. Consequently, employers may reduce spending, and borrowing costs for mortgages, home equity lines of credit, auto loans, and credit cards may also rise.
Resilient Labor Market
Despite the higher interest rates, the U.S. labor market has demonstrated surprising resilience. However, there are signs of a potential softening, with employers adding only 187,000 new workers in August. Additionally, the unemployment rate unexpectedly jumped to 3.8%, reaching its highest level since February 2022.
In summary, Goldman Sachs’ revised outlook on the U.S. economy reflects cautious optimism, with a lower probability of a recession in the coming year. Their confidence in the Federal Reserve’s stance on interest rates and positive economic indicators have contributed to this revised perspective, although it remains at odds with other forecasts in the financial community.
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