Goldman Economists Cut Recession Chances To 15%
Is the U.S. economy at last headed for a long-predicted recession? As economists digest the latest data, some are stowing their tray tables for a “soft landing” from the past two years of high inflation, while others are bracing for a crash.
Key Takeaways
- Goldman Sachs cut its prediction for the odds of a U.S. recession to 15% from 20%.
- Recent economic data suggests the Federal Reserve is on a path to achieve its goal of an economic “soft landing” from recent high inflation, rather than a crash.
- Other economists are divided on the issue, with many predicting a recession in the next year.
- Among obstacles threatening a soft landing: high interest rates and the resumption of student loan payments in October, which could hurt household budgets and could reduce spending.
Economists at Goldman Sachs are among the optimists: The investment bank’s economic foresters cut their estimated chances for a recession in the next year to 15% on Tuesday, down from their previous call of 20%. Other forecasters believe the economy will slump into a recession sooner rather than later as several powerful forces drag it down.
“The continued positive inflation and labor market news has led us to cut our estimated 12-month U.S. recession probability further,” Jan Hatzius, chief economist at Goldman, wrote in a research note Tuesday.
Just like at the end of a plane trip, a lot fewer people get hurt in an economic soft landing than in a crash. That’s why officials at the Federal Reserve have been aiming for a soft landing with their campaign of anti-inflation interest rate hikes since March 2022. The hikes are meant to slow down the economy and rebalance supply and demand, putting a lid on the rampant cost of living increases since 2021.
The risk is that the economy could slow so much that it falls into a recession, as it has historically. Eight of the last nine times the Fed has hiked rates to quell inflation, the economy has gone into a recession—most recently, the Great Recession of 2008.
Officials hope this time will be different, and inflation will come down with no recession. Economists remain sharply divided on whether or not that will happen. A Wall Street Journal survey of prominent forecasters in July put the odds of a recession at 54%, down from 61% earlier in the year.
Goldman has only grown more optimistic with the latest raft of reports on the state of the economy, which showed inflation pressures staying subdued, and the roaring job market downshifting somewhat while avoiding mass layoffs. Indeed, the economy is no more likely now to go into a recession than it is in any given year, according to Hatzius, who noted that the U.S. has had a recession every seven years since WWII.
Meanwhile, economists at ING repeated their prediction that the Federal Reserve’s campaign of anti-inflation interest rate hikes will lead to a recession in the coming months. By raising its benchmark interest rate to a 22-year high, the Fed has raised borrowing costs for all kinds of loans and put many parts of the economy under more stress than they can handle, ING argued.
The Fed’s rate hikes have especially hurt the housing market and the banking sector, ING said. Mortgage rates have skyrocketed, and the banking sector was rocked earlier this year by a string of high-profile bank failures caused at least in part by high interest rates.
Plus, millions of student loan borrowers will have a lot less spending money starting in October, when payments resume for federally-held loans, and that will take some steam out of consumer spending, the main engine of economic growth.
“After spring’s banking turmoil, the debt ceiling excitement, and more generally, the impact of higher Fed rates, the next big thing is the resumption of student loan repayments, starting in September,” Carsten Brzeski, chief economist for the Eurozone at ING, wrote in a commentary. “Together with the delayed impact of all the other drag factors, these repayments should finally push the U.S. economy into recession at the start of next year.”