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U.S. Recession Probability Drops to 15%


Goldman Sachs has revised its forecast for the likelihood of the U.S. entering a recession within the next year, reducing it to just 15%. Jan Hatzius, Chief Economist at Goldman Sachs, also projects a baseline GDP growth rate of 2% until the end of 2024.

This positive adjustment comes after a previous estimate of a 20% chance in July, which peaked at 35% in March. While other financial analysts expressed greater concern based on recent underperforming data, Goldman Sachs has maintained a consistently optimistic outlook on U.S. growth.

Although Hatzius acknowledges potential headwinds, such as the imminent resumption of student loan payments and the temporary impact of increased mortgage rates on the housing market, he anticipates these setbacks to be minor and short-lived.

His optimism is founded on two primary factors. Firstly, he expects a resurgence in real disposable income in the coming years, driven by steady job growth and rising wages. Secondly, he disagrees with the notion that the tightening of monetary policy by the Federal Reserve will ultimately lead to a recession.

In fact, Hatzius asserts that the drag caused by monetary policy tightening will continue to decrease over time and completely dissipate by early 2024. This belief reinforces Goldman Sachs’ positive stance on the future economic trajectory of the United States.

Falling Trimmed Mean Inflation Offers Relief for Central Bank

Goldman Sachs economist, Hatzius, believes that trimmed mean inflation has fallen to a range of 2% to 2.5% in recent months. This decrease in inflationary pressure will likely alleviate the need for further interest rate hikes by the central bank. Instead, Hatzius anticipates quarter-point interest rate cuts to begin in the second quarter of 2024.

Jobless Rate Increase Doesn’t Raise Concerns

In response to the mixed nonfarm payrolls report from last Friday, Hatzius remains optimistic despite signs of an uptick in the jobless rate. He explains that the 0.3 percentage point increase to 3.8% in August was solely driven by a rise in labor force participation. Moreover, the employment/population ratio remained stable and payroll growth saw an improvement, reaching 187k. This is noteworthy considering the negative impact of Yellow bankruptcy and the Hollywood strike, which accounted for a drag of approximately 50k.

Stock Market Loses Momentum Amid High Valuations and Rising Bond Yields

Goldman Sachs also shares insights on the stock market. Despite positive economic news, equities have recently lost momentum. This slowdown can be attributed to high valuations and increasing bond yields. However, there is potential for these headwinds to subside if earnings experience significant growth or long-term yields decline as forecasted by their rates strategists. Hatzius acknowledges that this year’s favorable soft landing and AI rally in the stock market may have already reached its peak, according to equity strategists’ predictions.

In 2023, the S&P 500 (SPX) has recorded an 18% gain thus far.

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