In the second half of last year and early this year, many economists warned that recession was coming.
But in light of moderating inflation and a resilient economy, many experts now think we’ll be able to avoid a downturn.
Jan Hatzius, chief economist at Goldman Sachs, is one of them. “We are cutting our probability that a U.S. recession will start in the next 12 months further from 25% to 20%,” he wrote in a report. Goldman pegged the possibility at 35% in March.
“This remains slightly above the unconditional average postwar probability of 15% — a recession has occurred approximately every seven years — but far below the 54% median among forecasters in the latest Wall Street Journal survey.”
Case for Optimism About Averting Recession
So what caused Goldman’s increased enthusiasm?
“The main reason is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” Hatzius said.
U.S. economic activity remains buoyant, with GDP on track for annualized growth of 2.3% in the second quarter, he said. Consumer sentiment is rebounding sharply, unemployment stands at a paltry 3.6%, and initial jobless claims have reversed their recent minispike, he noted.
“We do expect some [GDP] deceleration in the next couple of quarters, mostly because of 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,” Hatzius said.
“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.” Housing starts jumped 21.7% in May, the fastest pace in more than a year.
Inflation: June CPI Lowest Since February 2021
As for inflation, the 0.2% increase of the consumer price index, excluding food and energy, in June was the lowest since February 2021 and follows a string of 0.4% readings in 2023, Hatzius said.
But that doesn’t mean it’s just one month of better news, as other measures of underlying inflation have been easing for quite a while, he said. “Moreover, there are strong fundamental reasons to expect ongoing disinflation.”
First, used car prices are falling thanks to higher auto production and inventories, he said. Second, he expects rents to be pressured.
And third, the labor market has continued to rebalance with a downtrend in job openings, quits, reported labor shortages, and nominal wage growth.
Also, Hatzius doesn’t think the inverted yield curve means a recession is coming. An inverted yield curve means short-term interest rates exceed long-term rates.
Potential Fed easing could reverse the yield curve’s slope. He expects more than 200 basis points (2 percentage points) of gradual Fed rate cuts in the next two to three years.
As for the near term, Goldman expects a 25-basis-point interest-rate hike by the Fed this month to be the last of its cycle.
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