July 12, 2024

Goldman Sachs: US Recession Chances Drop to Just 15% for 2024


The U.S. economy is dodging the recession bullet, and Goldman Sachs strategists are here to explain why. In a recent note, they’ve lowered the odds of a recession in the next year from 20% to 15%, and their reasoning is as interesting as it is reassuring.

Goldman’s top economist, Jan Hatzius, gave us two compelling reasons for this optimism. First up, real disposable income is predicted to pick up speed in 2024, thanks to some sturdy job growth and fatter paychecks. As Hatzius puts it, “First, real disposable income looks set to reaccelerate in 2024 on the back of continued 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 added. In simpler terms, they don’t buy into the idea that the sluggish effects of changes in monetary policy will drag the economy into a recession.

But that’s not all. Goldman Sachs believes that the Federal Reserve is done with raising interest rates. This prediction comes as unemployment rises, wage growth slows, and core inflation continues to ease off. 

“On net, our confidence that the Fed is done raising rates has grown in the past month,” Hatzius states. “Fed officials are unlikely to move quickly toward easier policy unless growth slows more than we are forecasting in coming quarters. We therefore expect only very gradual cuts” beginning in the second quarter of 2024.

Goldman’s outlook is way more optimistic than most other predictions out there. We’re talking 60% pessimism in the Bloomberg consensus versus Goldman’s 15% optimism. So, are they wildly off track, or do they see something others don’t?

This update comes about a month after the consumer price index (CPI), a measure of everyday goods’ prices, showed a modest 0.2% increase in July. Although prices have climbed 3.2% over the past year, it’s the first time we’ve seen a slowdown in a year, showing the struggle to tame inflation.

Despite the Fed’s aggressive moves to raise interest rates, inflation still hangs around. Core prices, which leave out the more unpredictable food and energy costs, climbed 0.2% or a whopping 4.7% annually. That’s more than double the usual pre-pandemic levels.

Now, let’s talk about those rate hikes. The Fed has been on a roll, approving 11 rate hikes in just one year, taking rates from near zero to above 5%. That’s the fastest tightening we’ve seen since the 1980s. However, they’re saying they’re still going and will only back off once they’re sure inflation is under control.

Hatzius has a different take. He says a September rate hike is “off the table,” and November would require something significant.

Now, how do these rate hikes affect you? Well, higher interest rates mean higher rates on loans for consumers and businesses. This, in turn, forces employers to cut back on spending, which can slow down the economy. Mortgage rates have surged past 7% for the first time in years, and everything from home equity lines of credit to auto loans and credit cards has gotten more expensive.

Despite these economic challenges, the labor market has shown resilience, although recent numbers suggest it’s starting to soften. In August, employers added just 187,000 new workers, while the unemployment rate unexpectedly jumped to 3.8%, its highest level since February 2022.

So, while the economy might not be in the clear yet, there’s a glimmer of hope that we’re not trembling on the edge of a recession either.

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