February 5, 2023

The U.S. economy is showing signs of decline, with many consumers cutting back on spending amid high inflation and shrinking growth. But despite mounting fears of a recession, Goldman Sachs think the country may just avoid a downturn. 

The U.S. appears likelier to experience a “soft landing” — where the economy weakens enough to slow hiring and wage growth, bringing inflation down from its current levels to about 2% a year — without tumbling into recession, economists with the investment bank said Monday in a report.

The economy is showing “encouraging signs” that a soft landing could be in the cards, Goldman said. The report comes amid widespread concerns that the Federal Reserve’s series of interest-rate hikes, designed to tame the highest inflation in four decades, could send the economy into a tailspin, sparking layoffs and financial misery for millions of Americans. 

To be sure, the Goldman analysts added that a recession is still a 1-in-3 possibility. And other economists are less sanguine, with Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, pegging the odds of a recession within 12 months at 40%, according to a research note. 

But Marcelli also noted the economy is showing resilience, including a healthy August jobs report that showed employers are still hiring, albeit more slowly than earlier this year. 

Goldman chief economist Jan Hatzius and his group pointed to progress in three key areas that could signal a soft landing. 

Declining inflation

The data on inflation “has been particularly encouraging,” Goldman noted. 

“Sharply lower commodity prices, a stronger dollar and large improvements in supply-chain disruptions all suggest that goods price inflation will continue to abate,” they wrote.

Inflation data for August will be released on September 13, with Marcelli predicting the consumer price index will be flat on a month-over-month basis due partly to lower gasoline prices. 

“Inflationary pressure on goods prices has clearly eased and some overheated prices — for example, used cars — are starting to fall in absolute terms,” Marcelli wrote. “Overall, we expect inflation to slow in the months ahead.”

Solid job growth

Recessions typically bear several markers, ranging from shrinking gross domestic product to a spike in unemployment. Although GDP has contracted for two consecutive quarters this year, the nation’s jobless rate remains low, which is one reason why some economists argue the economy isn’t in a recession. 

“The labor market news has also been encouraging,” Goldman analysts noted. 

Both hiring and wage growth are slowing, two positive trends that signal a rebalancing within a labor market that had been overheated as employers competed for scarce workers, the economists noted. So far, it appears as though the U.S. may avoid a spike in unemployment as the labor market cools, they added. 

Moderating economic growth

GDP growth is slowing due to declines in real disposable personal incomes and high inflation. But, Goldman analysts noted, that “hit has largely run its course.”

To be sure, the economy is still facing headwinds from higher interest rates, especially in the housing market, where mortgage costs have soared as 30-year loans have inched over 6%. 

But while the U.S. economy is likely to experience slower economic growth, it may not experience a contraction, with Goldman pegging growth at 1.6% in 2022 and 1.2% in 2023.

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