Like many of his Wall Street peers, Goldman Sachs chief economist Jan Hatzius has been rethinking the possibility of a U.S. recession in 2023. The labor market proved resilient as inflation eased from a four-year high. After more than 17 months of aggressive rate hikes, he now sees only a 15% chance of a U.S. recession next year, down from his January forecast of 35%.
“Continued positive inflation and labor market news led us to further lower our estimate of the 12-month probability of a U.S. recession,” he wrote to clients on Monday, noting that 15% was the average recession probability since World War II.
Goldman Sachs
While Hatzius isn’t the only economist growing increasingly bullish about 2023, he remains one of the most bullish on Wall Street. The consensus probability of a U.S. recession in the next 12 months remains near its highest level since the pandemic, at 60%. Still, Hatzius expects the economy to continue growing, with GDP averaging 2% by the end of 2024, despite the cooling effect of rising interest rates.
The veteran economist may be more bullish than most on the post-pandemic U.S. economy, but he’s far from forever bullish.hatzius made a Name He made some pretty pessimistic — needless to say prescient — predictions for himself ahead of the global financial crisis in 2007; thus, when he says a “soft landing” is the most likely outcome for the economy , people will pay attention.
Moderate economic slowdown, not recession, expected
Late last year, when most Wall Street forecasters were more convinced than they were now that a recession was inevitable, Hatzius pushed back.
His peers agree that the Fed can curb inflation only if rate hikes cause unemployment to soar, forcing businesses to cut prices as demand for goods and services falls. But Hatzius argues that Fed rate hikes won’t lead to higher unemployment, just a drop in U.S. job vacancies, which have soared to record highs during the pandemic, while still helping to keep inflation in check.
Essentially, he argues that a drop in job openings from record highs could cool the economy, but not freeze it. So far, his theory is correct.Inflation falls, and the quantity US job vacancies The population fell from over 12 million in March 2022 to 8.8 million in July, while the unemployment rate has remained below 4%.
On Monday, the veteran economist reiterated his forecast that rising interest rates will not trigger a recession. Growth is likely to slow in the fourth quarter due to a resumption of student loan payments and a “short-term hit to the housing market” from rising mortgage rates, but the slowdown will be “shallow and short-lived” for several key reasons, he said. of” .
First, steady employment and wage growth should boost consumers’ real disposable income (the inflation-adjusted measure of after-tax disposable income) and help spur more spending. Consumer spending accounts for about 70% of U.S. GDP, so spending more is a big deal.
Hatzius said he was also “not concerned” about the unemployment rate’s modest rise of 0.3 percentage points to 3.8% in August, as it was due to a rise in labor force participation (ie more people entering the labor force) rather than a fall. Firm wage growth (i.e., less hiring). He sees it as an example of a labor market “rebalancing” after years of companies struggling to find enough talent.
Finally, Hatzius dismissed the notion that rate hikes have a “long and variable lag” in the impact on the economy that goes undetected and ultimately pushes the economy into recession. “Indeed, we think the drag from monetary policy tightening will continue to wane before disappearing entirely by early 2024,” he wrote.
The end of inflation and rate hikes?
Inflation has been a thorn in the side of the Fed for more than two years, but Hatzius thinks the central bank may have defeated its worst enemy.
Although commodity prices, especially crude oil, have risen in recent weeks, Hatzius believes that “underlying inflation may already be close to the Fed’s target” of 2%.
He pointed to core inflation measures that exclude volatile food and energy prices as evidence that the worst is over for consumer price increases.For example, the trimmed average personal consumption expenditures (PCE) price index (focusing only on core goods and services prices and removing the largest and smallest price changes before averaging the rest of the components) is Hatzius’s “favorite” measure of inflation, and it is sitting 2.4%.
Hatzius also sees Fed officials becoming more dovish after Fed Chairman Jerome Powell spoke in August at a central bank conference in Jackson Hole, Wyoming.
“Our confidence that the Fed is done raising rates has increased,” he wrote on Monday. “We see Chairman Powell’s pledge to ‘proceed with caution’ at Jackson Hole as a signal that a September rate hike is out of the question and that the hurdles to a November hike are high.”
However, the economist said he expects “very gradual” rate cuts to begin only in the second quarter of 2024, as the Fed needs to be confident that inflation is truly under control. Before investors celebrated the possible end to inflation and interest rate hikes, Hartzius warned of a lack of potential for stocks this year following a recent artificial intelligence-led market rally. Even if a recession is avoided, “much of this year’s soft landing and AI rebound may have already been achieved,” he wrote.
Svlook
