Goldman Sachs (NYSE: GS) has updated its analysis, reducing the odds of a US recession happening in the next year from 25% to 20%. This figure is still a bit higher than the 15% postwar average, indicating a recession roughly every seven years, but is considerably less than the recent Wall Street Journal survey median of 54%.
The investment banking giant holds the view that the Federal Reserve’s fight against inflation doesn’t necessarily mean a full-blown recession is looming. They highlight the robustness of the US economy, citing a variety of indicators that demonstrate continued strength.
The second quarter showed GDP growth of 2.3%, a strong bounce back in consumer sentiment, and a drop in unemployment to 3.56% in June. Initial unemployment claims have also begun to decrease.
Although a slight economic slowdown is anticipated in the upcoming quarters, mainly due to decelerating growth in real disposable personal income, particularly with the resumption of student loan payments in October, and a decrease in bank lending, overall financial conditions seem to be improving.
The housing market is recovering, and there is a surge in factory construction, both of which indicate that the US economy will continue its growth trajectory, albeit at a slightly slower pace.
Regarding the popular concern about yield curve inversion, Goldman Sachs isn’t as alarmed. The bank clarified that while historically an inverted curve has often signalled an approaching recession, the current cycle has some distinctive aspects.
“Firstly, the term premium is significantly below its long-term average, requiring fewer anticipated rate cuts to invert the curve. Secondly, the Fed could ease rates simply in response to lower inflation… Lastly, if current recession forecasts are too pessimistic, then the rates market investors, and hence the expectations built into the yield curve, are likely overly pessimistic as well.”
Post 2023, Goldman Sachs suggests that the market might be expecting an overcorrection in terms of rate cuts compared to their basic fund’s rate forecast and probability-adjusted path.
