The U.S. economy may dodge a recession in the upcoming year, a more optimistic prediction than previously projected, says a team of strategists from Goldman Sachs. In their latest analyst note released on Tuesday, the group, led by economist Jan Hatzius, reduced the likelihood of a recession onset within the next 12 months to 15%, down from a previous forecast of 20%. This optimistic revision is attributed to moderating inflation and a labor market that has displayed unexpected resilience, even in the face of potential economic downturns.

Hatzius and his team also suggest that the Federal Reserve’s cycle of interest rate hikes may have reached its conclusion as unemployment figures rise, wage growth slows, and core inflation continues its moderating trend. This perspective stands in stark contrast to many other forecasts, including a Bloomberg consensus that places the likelihood of an impending recession at 60%. The Goldman Sachs outlook, substantially more optimistic, is underpinned by the expectation of only "very gradual cuts" to policy beginning in the second quarter of 2024.

Goldman Sachs Slashes US Recession Odds to 15%

Goldman Sachs economists, led by Jan Hatzius, have revised their prediction for a US recession in the upcoming year, reducing the probability from 20% to a more optimistic 15%. This new prediction, shared in a Tuesday analyst note, comes in light of easing inflation and a surprisingly robust labor market.

Factors Contributing to the Optimistic Outlook

According to Hatzius, two key factors have led to the revised forecast. "Firstly, we foresee real disposable income set to reaccelerate in 2024, propelled by solid job growth and rising real wages," Hatzius said. "Secondly, we disagree with the idea that a growing drag caused by the ‘long and variable lags’ of monetary policy would push the economy towards a recession."

Furthermore, Hatzius believes that the Federal Reserve has concluded its interest rate hikes as unemployment increases, wage growth decelerates, and core inflation persists to moderate.

The Federal Reserve and Interest Rates

"On the whole, our confidence that the Fed is done raising rates has strengthened in the past month," Hatzius noted. However, he added that Federal Reserve officials are unlikely to move swiftly towards an easier policy unless growth slows more than Goldman Sachs’ current forecasts for the upcoming quarters. "As such, we anticipate only very gradual cuts, starting in the second quarter of 2024."

A More Positive Outlook than Others

Goldman Sachs acknowledged that its economic outlook is significantly more optimistic than many other forecasts, including a Bloomberg consensus of 60%. This revised forecast comes about a month after the government reported a mere 0.2% rise in the consumer price index in July, marking the first acceleration in a year and highlighting the struggle to control high inflation.

Impact of Interest Rates on Economy

Over the past year, the Fed has aggressively raised interest rates, with 11 rate hikes approved in an attempt to curb inflation. These hikes, which saw interest rates rise from nearly zero to over 5% within a year, have resulted in higher rates on consumer and business loans. This increase has in turn slowed the economy by causing employers to reduce spending. Despite this, the labor market has shown remarkable resilience, although there are signs it is beginning to weaken.

Takeaway

The revised prediction by Goldman Sachs offers a more positive outlook for the US economy in the coming year. However, it’s crucial to remember that these forecasts can only provide a guide, not a guarantee. The economy’s future will depend on a range of factors, such as the progression of inflation, job growth, and the Federal Reserve’s actions on interest rates. As such, while the prediction is a positive sign, individuals and businesses should continue to plan and prepare for various economic scenarios.