Goldman on Monday cut the subjective odds they assign to a US recession. Again.
The chances of a US downturn occurring over the next 12 months are now 20%, according to Jan Hatzius. It was the second time in two months he reduced the probability of a recession.
In early June, Hatzius cited the abatement of downside risks from the regional banking turmoil in cutting the bank’s “judgmental” odds. Fast forward six weeks and he pointed to “recent data,” which together “reinforce” Goldman’s faith in the notion that inflation can be brought to heel without a downturn.
Goldman has long harbored a constructive view on the so-called “immaculate disinflation” narrative, which says the Fed can engineer slower wage growth and lower inflation without a marked increase in the unemployment rate by rendering millions of job vacancies superfluous. As the figure above makes clear, Goldman remains significantly more optimistic than consensus.
Although Hatzius still expects the economy to decelerate commensurate with slower real disposable personal income growth (and “drag from reduced bank lending”), he said easier financial conditions, along with “the rebound in the housing market,” point to an economy that’ll keep expanding, “albeit at a below-trend pace.”
Meanwhile, JPMorgan still doubts it. All of it, pretty much.
“Risk markets are currently priced like we are in the middle rather than the end of the economic cycle,” analysts led by Marko Kolanovic wrote Monday. “We disagree and continue to see a recession as the most likely scenario.”
The bank has its reasons. “We acknowledge the disinflation process of the past year [but] the current pace of core inflation is significantly above the Fed’s target and would require monetary policy to stay in restrictive territory for a prolonged period of time,” Kolanovic and co. said, adding that “most economic models predict the next phase of disinflation towards the 2% target would require a more significant employment sacrifice.”
That’s the point of contention. Job vacancies have done a lot of the heavy lifting so far, and there’s presumably a point beyond which matching efficiency (or, more aptly, inefficiency) will limit the extent to which openings can keep falling. At that point, additional progress towards a pace of wage growth consistent with price stability would ostensibly require a higher unemployment rate.
Nobody knows where the threshold is, but job openings are still very elevated. You can look at that one of two ways. A glass half-full take says there’s still plenty of room for a decline in vacancies to shoulder the burden of labor market normalization. A glass half-empty assessment says the fact that vacancies are still as high as they are is indicative of a structural mismatch that monetary policy can’t address and that isn’t going to resolve on its own.
In any event, JPMorgan tacitly conceded that a US downturn may get pushed into next year, but warned that in such a scenario, the recession could “be deeper and more prolonged.”
Separately, the bank’s Joyce Chang flagged a “perceptible shift” in the macro debate “towards a soft landing or very mild recession,” something JPMorgan views as worrying considering the recent inflation downshift “may not be the watershed moment the market is currently pricing.”
Negative macro only matters to the extent it leads to negative earnings or falling valuations, within the investment horizon of the investor in question. 2Q earnings/guides have yet to be writ, but rising 2023 estimates and benign guides and reports so far hint that earnings season may be “okay”. Valuations are stretched but with the 10 year not breaking over 400 bp there isn’t an obvious negative catalyst. Ominous macro and positioning indicators for 3Q earnings season are not an imminent problem. Coming with the rather general confusion over exactly what all these conflicting macro signals mean, and neutral market positioning with micro (security level) bets feels safer than highly convicted directional market bets.
Good comment, and I agree with you, @JohnLiu, 100%. I’m not without optimism and patience for Q3 and Q4 to show more positive signs. This is a most modest downturn. I reckon we just had too much money sloshing around in the economy. I’m not at all surprised that the US economy is holding up well.
The pandemic was disorienting. We had pessimism after the pandemic, and we worried and had concern afterwards. Trump’s management of the economy increased the volume of cash with a tax cut for the wealthiest folks. Biden entered office with a massive stimulus action. The wealthy in the US and our markets were swimming in an ocean of money. In addition, only a small proportion of the US working population is lacking in work.
And don’t get me wrong. I do not promote Trump’s actions when he was in office. If anything, his (and Paul Ryan’s) tax cut was irresponsible. But as it turns out, that extra cash in the economy served a purpose. My fingers are crossed that we’ll see broader improvements in 2024. And I don’t mind the idea of looking forward to a wealth tax in 2025. If the market and my holdings are still doing well, I will gladly pay it.
I saw today that Goldman actually spake the “this time is different” line that usually seals investors’ doom. I’m long believed that inverted yield curves are not (merely) an indicator of recession, but a (contributing) cause of recession, via the bank credit dynamics with which we are now all familiar. Many things seem not evidently “different”: withdrawal of fiscal stimulus, draining of monetary stimulus (liquidity), developing recession in the world’s #2 economy, shaky debt piles both public and private, etc. One major thing that is “different” is the US labor market, where the pandemic’s societal effects took as much as 8MM from a 165MM labor force, leading to the tightest labor market since, I’d guess, WW2. Another “different”, in degree anyway, is the sheer scale of stimulus in the 2020-2022 period. I don’t have strong conviction whether things are, or are not, different this time, but remain neutrally positioned rather than aggressively positioned.