Goldman Sachs lowers US recession odds citing lower inflation and resilient job market

Goldman Sachs (NYSE: GS ) has reduced the odds of a US recession from 20% to 15%, marking the third revision in as many months. The decision comes as inflation continues to slow without a corresponding increase in unemployment. The Wall Street bank initially lowered its recession risk from 35% in March following a financial system scare when multiple banks failed.

The bank's economists have pointed to promising recent data on inflation and the jobs market, which they believe will fuel the economy sufficiently to withstand the Federal Reserve's high interest rate increases expected next year. Jan Hatzius, Goldman's chief US economist, expressed confidence that the drag from monetary policy tightening would vanish entirely by early 2024.

Goldman Sachs' report is more optimistic than the general consensus about the economy's future. However, it aligns with a broader trend of economists and financial institutions dialing down recession forecasts. A much-anticipated recession in 2023 has yet to materialize as the labor market remains robust and wages grow while inflation decreases.

In August, U.S. businesses added 187,000 jobs, indicating a slowing but still strong job market compared to historical standards. The nation's unemployment rate increased slightly to 3.8% from 3.5%, attributed to more people rejoining the workforce. The labor force participation rate rose to 62.8% in August, its highest level since February 2020.

Inflation has also significantly cooled since reaching a peak of 9.2% last summer. The consumer price index was at 3.2% for July, above the target of 2%, but a marked improvement following a series of interest rate increases by the Federal Reserve.

The economy continued to expand at a 2.1% annual pace in Q2 (April-June), following a 2% increase in Q1. Analysts have also raised expectations for Q3 growth above 5%, according to a tool by the Federal Reserve Bank of Atlanta.

The Federal Reserve has been aiming for a "soft landing," where inflation recedes back to 2% year-over-year without tipping the economy into recession. Fed Chair Jerome Powell expressed optimism about avoiding a recession after their July meeting, citing the economy's recent resilience.

Despite potential challenges like further rate increases to curb inflation and reduced consumer spending due to the return of student loan payments, nearly half of respondents in a National Association for Business Economics survey don't expect a recession until H2 2024 or later. Two-thirds are confident that the Fed will achieve a soft landing.

However, economists are closely watching signs like savings accounts emptying and an increased reliance on credit, which could indicate slower consumer spending in upcoming months.

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