The world’s biggest investment bank, Goldman Sachs, cut its probability that a US recession would start in the next 12 months to 15% from an earlier 20% forecast, citing continued positive inflation and labor market data. The firm’s chief economist, Jan Hatzius, noted that the bank expected reacceleration in real disposable income next year due to continued solid job growth and rising real wages, while the drag from monetary policy tightening should fade by early 2024.
This is the second time the New York-based giant has reduced its recession odds in less than a month. According to Yahoo Finance, its latest assessment is below the Bloomberg consensus of 60% and the average forecast among Wall Street banks.
Hatzius also said he sees an increased chance of a “decoupling” in the economy, with more robust housing and manufacturing gains offsetting weaker consumer spending. He added that this decoupling could be further helped by a strong jobs market, which should boost household wealth and bolster consumption.
Despite the positive outlook, there are plenty of risks to the economy. For one, the recent slowdown in consumer spending has been worrying, and loan growth is expected to stall. Moreover, higher deposit costs have started to weigh on some banks’ bottom lines.
Another risk is the ongoing turmoil in the financial sector, with JPMorgan Chase & Co (JPM) and Citigroup Inc (CIT) posting disappointing results last week. Citi reported lower-than-expected profit and a larger-than-expected charge on its debt trading business, while a steep drop hit JPMorgan’s profits in interest rates.
Then there is the partisanship in Washington, which has reached record levels and eroded the ability of politicians to compromise and work together for the country’s good. “The level of compromise necessary to support the nation’s best interests has never been lower,” Hatzius wrote in his note.
The Fed appears to be nearing the end of its hiking cycle, leading some to fear that it will miss its inflation target and push the economy into a recession. But Hatzius said he believes the central bank’s decision to take a “patient” approach to interest rates in the coming years will allow it to reach its goal without a recession.
Investors will get more clarity on the Fed’s interest rate strategy when the Fed releases its upcoming economic projections on Sept. 5. The bank has already signaled that it expects to keep rates on hold for now and will only hike again in December. Nevertheless, a lot hinges on the next presidential election, and there is still uncertainty about how it will impact the economy. In the meantime, the market will continue to focus on earnings reports, which are expected to be mixed this quarter. JPMorgan is set to report on Friday, while Citigroup will follow the next day. Goldman Sachs is scheduled to release its quarterly earnings on Monday.
