The likelihood of a recession in the United States next year has been revised lower by Goldman Sachs strategists, suggesting a more positive outlook for the economy. In a recent analyst note, led by Jan Hatzius, the Goldman economists reduced the probability of a recession occurring within the next 12 months from the previous forecast of 25% to 20%. This adjustment was made in light of better-than-expected economic data, which has bolstered confidence that managing inflation at an acceptable level can be achieved without necessitating a recession. Hatzius stated, “We are cutting our probability that a US recession will start in the next 12 months further from 25% to 20%. The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession.”
The recent note from Goldman Sachs comes shortly after the government’s report indicating a modest increase of 0.2% in the consumer price index (CPI) for June compared to the previous month. This index measures the prices of everyday goods, including gasoline, groceries, and rents. On an annual basis, prices rose 3%, marking the slowest pace in over two years. The report also highlighted a faster-than-anticipated decline in core inflation, which stood at 4.8% on an annual basis, the lowest level since 2021.
Despite the ongoing decrease in inflation, it is widely anticipated that the Federal Reserve will approve another quarter-percentage interest rate hike at the end of its upcoming two-day meeting. However, Hatzius expects this to be the final increase in the Fed’s tightening cycle, as concerns over potential significant economic slowdown persist. Hatzius noted, “We do expect some deceleration in the next couple of quarters, mostly due to slower real disposable personal income growth, particularly when accounting for the resumption of student debt payments in October, and reduced bank lending.”
Over the past year, policymakers have implemented a series of sharp interest rate hikes, with 10 consecutive increases aimed at curbing inflation. Interest rates have risen rapidly from near zero to above 5%, representing the most accelerated pace of tightening since the 1980s. Officials are anticipated to approve an 11th rate hike at the conclusion of their upcoming two-day meeting, driven by indications of underlying inflationary pressures. The impact of higher interest rates has led to increased rates on consumer and business loans, subsequently slowing the economy by prompting employers to reduce spending. Mortgage rates, for example, have surpassed 7% for the first time in years. Borrowing costs for home equity lines of credit, auto loans, and credit cards have also experienced significant increases.
Despite the influence of higher interest rates, the labor market has demonstrated surprising resilience, although there are signs of potential softening. In June, employers added just 209,000 new workers, making it the weakest month for job creation since December 2020.