Goldman was already on the low end of the range when it comes to recession odds for the US economy in 2023.
The bank saw just a 35% subjective probability of a downturn over the next 12 months compared to the 65% median of professional forecasters.
Goldman’s more optimistic projection relied, in part anyway, on assumptions about a resilient consumer given the likelihood of higher disposable income as inflation wanes. In addition, the bank has repeatedly suggested that market participants are misreading Milton Friedman. Specifically, Goldman says the “long and variable lags” debate often confuses GDP growth with GDP levels, a crucial distinction. They argued in December that the peak drag on GDP growth from the cumulative tightening in financial conditions since the start of 2022 happened in Q4, and should fade this year.
On Monday, the bank lowered its subjective recession odds even further in consideration of last week’s data. After noting that “continued strength in the labor market and early signs of improvement in the business surveys suggest the risk of a near-term slump has diminished notably,” Jan Hatzius alluded to both discussions mentioned above. “While Q1 GDP still looks soft, we expect growth to pick up in the spring as real disposable income continues to increase [and] the drag from tighter financial conditions abates,” he said.
Although Hatzius cautioned that the labor market is obviously still out of balance, he suggested markets should “heavily discount the latest JOLTS report.” Last week’s release showed the number of job openings across the US economy on the last business day of December jumped sharply, bad news for the Fed’s soft landing aspirations.
But the headline JOLTS print “is far out of line with timelier indicators,” Goldman said, citing LinkUp and Indeed, before suggesting that the JOLTS data likely also sends a false signal about wage growth, which the bank puts at 4.25%, “nearly two-thirds of the way from the 5.5% peak seen in early 2022 to the 3.5% pace that we think is compatible with the Fed’s 2% inflation target.”
Further, Hatzius emphasized that although the disinflationary tailwind from supply chain normalization and falling goods prices will eventually wane, it should be “more than offset” by the manifestation of pipeline housing disinflation in the actual data — i.e., by the CPI series catching up to what’s already happening in the economy.
As the figure on the right shows, asking rents on new leases suggest shelter inflation is about to plummet.
Ultimately, the labor market plainly indicates there’s more work to be done, and the less likely a recession is, the higher the policy rate can go and the longer it can stay at terminal, which accounts for Goldman’s contention that Fed funds will breach 5% and stay there for “about a year.”
The bank’s new call on recession odds is just 25% over the next 12 months, which, while on the very low end of the range from dozens of forecasts, is nevertheless 10 points higher than the historical unconditional probability that the US economy will enter a recession in any given 12-month period.
