Goldman Raises US Recession Odds. Cuts Growth Outlook

The implied outlook for US economic growth is now “somewhat worse.”

That’s according to Goldman, who, in a carefully worded note, cut its forecasts for the world’s largest economy citing, among other things, a more aggressive Fed.

Joseph Briggs said the steeper rates path, in conjunction with tighter financial conditions, points to slower growth and higher unemployment next year.

Terminal rate pricing ratcheted higher in the wake of inflation data which suggested underlying price pressures were more acute than anticipated last month. At the same time, US real rates continued to move up, driving dollar strength and equity weakness. Markets appear to be at a breaking point. 10-year real yields are almost 100bps higher over the past six weeks.

Fed pricing has firmed (figure below). The prospect of rate cuts in the back half of 2023 reflects consternation about the impact of restrictive policy on the economy.

Some traders are now hedging for (or “placing bets on,” if you like) rates rising well beyond the market-implied peak. As Bloomberg’s Edward Bolingbroke detailed, several “notable trades appear to anticipate a peak in the range of 4.75% to 5.25% [including] a wager predicated on the policy rate ending next year at 4.5%,” as opposed to falling to around 4% as shown in the figure.

The refreshed dot plot (which will accompany the new SEP next week) could embolden such wagers. Or torpedo them. If recent Fedspeak is any indication (and in this case it most assuredly is), policymakers will be loath to suggest rate cuts are a possibility next year. Multiple officials have said as much explicitly and Jerome Powell will doubtlessly be queried on his view during the press conference.

In his nervously coarse Jackson Hole address, Powell emphasized that “reducing inflation is likely to require a sustained period of below-trend growth.” “[T]here will very likely be some softening of labor market conditions,” he added. Suffice to say some economists believe “some softening” is a wholly euphemistic way to describe what may be a very meaningful increase in the unemployment rate.

In cutting their outlook for the economy, Goldman said a “below-potential growth trajectory” will likely be “necessary to cool wage and price inflation.” “We still forecast GDP growth of +1.1%/+1.0% in 2022Q3/Q4 and 0% GDP growth in 2022 on a Q4/Q4 basis, but now expect GDP growth of +0.75%/+1.0%/+1.25%/+1.25% in 2023Q1-Q4 (vs. +1.25%/+1.5%/+1.5%/+1.75% previously) and +1.1% growth in 2023 on a Q4/Q4 basis (vs. +1.5% previously),” the bank wrote. The figure (below) gives you some context.

Like the Fed’s own view, Goldman’s forecasts may be seen by some as optimistic under the circumstances. The bank’s new projection for the unemployment rate is 4.1% by year-end 2023, and 4.2% by the end of 2024.

Some, including Larry Summers, believe the odds of the Fed bringing inflation down to target without driving unemployment to 5% or higher are very slim, notwithstanding the notion that millions of superfluous job openings can be conceptualized as “free” job losses — job losses that don’t entail anyone actually being let go.

In an interview with Goldman for the latest installment of the bank’s “Top Of Mind” series, Olivier Blanchard said there’s no chance of an “immaculate conception outcome in which job openings decrease and unemployment doesn’t increase.”

Speaking to colleague Allison Nathan for the same piece, Jan Hatzius kept the faith, albeit while conceding downside risks.

“Reducing job openings without a sharp rise in unemployment has never happened before, so why are you confident that it doesn’t need to happen this time?” Nathan wondered. “While it’s true that such an adjustment would be unprecedented, 2021 was also an incredibly unusual environment,” Hatzius said. “GDP grew at its fastest pace relative to potential in at least four decades, and supply, and labor supply in particular, was exceptionally constrained by pandemic-related effects, trends [which] are reversing in the current post-pandemic environment,” he added.

Demand is slowing “significantly, and supply is improving,” Hatzius continued. “As the labor market moves to a lower level of utilization in this environment, we think it can rebalance in a way that is substantially tilted towards a decline in job openings rather than towards an increase in the unemployment rate.”

That was on September 13. In the same remarks, Hatzius reiterated the bank’s view that recession odds were “about 30% over the next 12 months and close to 50% over the next 24 months,” but said he’s “a little more confident” now versus earlier this year “that the Fed will be able to achieve a soft landing.”

Less than four days later, Briggs said the bank now sees “somewhat higher risks of a recession following our forecast changes, and are therefore raising our odds of a recession in the next 12 months to 35%.”

Still, Briggs wrote, receding inflation expectations, a slower pace of goods inflation and strong household balance sheets “limit the odds that the economy will slip into a recession in the near-term and are part of the reason why we expect that any post-COVID US recession would likely be mild.”


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6 thoughts on “Goldman Raises US Recession Odds. Cuts Growth Outlook

  1. Will bearish sentiment prove to be as transitory as inflation? Reading your post, it sort of feels that way. Yet, last night, Nashville, where I live, was smoking. The recently opened Conrad and Hyatt Regencies were doing good business, and the hot new Halls Chophouse was slammed full, with a Rolls Royce and Sterling convertible among the more plebeian Teslas and Mercedes being guarded by the Valet troops. Even the Tennessee masses seemed to be in high-gear party mode, with Lower Broadway Street closed to accommodate the overflowing Honky Tonks. Saw similar revelry in Miami last week. What’s it like further north on Florida’s east coast? I’m guessing economic anomalies are becoming regional norms. Deciphering the economy has morphed more a local phenomena. And that could seriously stymie the economic prognostication business.

    1. I’ve seen quite a few folks post these sorts of anecdotes over the past several months. While (obviously) welcome, I’d gently suggest they aren’t all that useful in drawing conclusions about the rate of change in overall real output. Also, even if the unemployment rate rose “all the way” to 5.5%, that’d be peanuts compared to every historical US recession with the exception of 2001 and 1970. You could (pretty easily) suggest that if the Fed were really interested in getting inflation back down to target expeditiously, the unemployment rate needs to be north of 7%.

      I was a regular (and by “regular” I mean fixture) of the local high-end bar scene in a second-tier US city after Lehman. There was never any obvious sign that something was amiss in the US economy.

      Let’s be clear on something because I think this might help: A situation where everyday people, in everyday experience, see unequivocal evidence of recession while going about their daily lives isn’t a recession. It’s a depression. With a “d.”

      1. H.,

        Nice to read someone bold enough to write the letter “d” though “D” might be even better. The art symbol I see as best for the depicting the comment preceding yours would be the original cover art for “The Great Gatsby”. Party time again. Eerily appropriate.

  2. Low unemployment, student loans payments being suspended, side gigs while working from home, and stimulus payments have helped people reduce the proportion of income going to debts. I could see a lot of people living as though nothing is wrong while racking up new credit card debts. Just because restaurants are busy doesn’t mean people are financially doing well. Appearances are the last shoe to drop.

    I once heard about the “new underwear” barometer for the economy. In which you could tell how well households are doing by how much new underwear they buy (since it’s an article of clothing that isn’t visible to the public). Part of me wonders how to get these numbers and what they look like over 2022.

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