Goldman Sachs trims US recession odds next year to 20%

The U.S. economy has a better chance of skirting a recession next year than previously believed, according to Goldman Sachs strategists.

In a Monday analyst note, Goldman economists led by Jan Hatzius lowered their probability of a recession starting in the next 12 months to 20% from an earlier 25% forecast, citing better-than-expected economic data. 

“We are cutting our probability that a US recession will start in the next 12 months further from 25% to 20%,” Hatzius wrote. “The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession.”

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The note comes less than one week after the government reported that the consumer price index, a broad measure of the price for everyday goods, including gasoline, groceries and rents, rose just 0.2% in June from the previous month. Prices climbed 3% on an annual basis, the slowest pace in more than two years.

The report also pointed to a faster-than-expected decline in core inflation, which climbed just 4.8% on an annual basis — the lowest level since 2021. 

Despite the continued retreat in inflation, the Federal Reserve is widely expected to approve another quarter-percentage interest rate increase at the conclusion of its two-day meeting next week. However, Hatzius said he expects this will be the final increase in the Fed’s tightening cycle amid fears that economic growth could slow drastically. 

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“We do expect some deceleration in the next couple of quarters, mostly because of sequentially slower real disposable personal income growth — especially when adjusted for the resumption of student debt payments in October — and a drag from reduced bank lending,” he wrote. 

Policymakers have raised interest rates sharply over the past year, approving 10 straight rate hikes in hopes of crushing inflation. In the span of just one year, interest rates surged from near zero to above 5%, the fastest pace of tightening since the 1980s. Officials are expected to approve an 11th rate hike at the conclusion of their two-day meeting next week amid signs of underlying inflationary pressures. 

Hiking interest rates tends to create higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates have helped push the average rate on 30-year mortgages above 7% for the first time in years. Borrowing costs for everything from home equity lines of credit to auto loans and credit cards have also spiked.

The labor market has proved surprisingly resilient despite higher interest rates, although there are signs it is beginning to soften. Employers added just 209,000 new workers in June, the worst month for job creation since December 2020.