Goldman reduces recession forecast once more due to sluggish inflation.
Goldman Sachs: Odds of Recession Shrink as Inflation Falls
Goldman Sachs has announced that the chances of a recession are decreasing, thanks to a significant drop in inflation. This is positive news for President Joe Biden’s reelection campaign.
According to Jan Hatzius, Chief Economist at Goldman Sachs, the probability of a recession in the next 12 months has decreased to just 20%, down from 25% the previous month. This revision comes after the financial services giant had already lowered its forecast from 35% in March.
“This remains slightly above the unconditional average postwar probability of 15%—a recession has occurred approximately every seven years,” 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.”
This update on recession odds is welcome news for the Biden administration, which has been striving to highlight the positive aspects of the economy under “Bidenomics.” The administration has been emphasizing the lower inflation rates and robust job market as evidence of a healthy economy. A recession in 2024 would pose a threat to Biden’s reelection prospects.
The June consumer price index report revealed that inflation has dropped to a 3% annual rate, a full percentage point lower than the previous month. Additionally, the producer price index for June showed inflation at just 0.1% for the year.
These reports indicate that the Federal Reserve is making unexpected progress in curbing inflation, despite the strong labor market and historically low unemployment rates.
Goldman Sachs’ recession odds are now at their lowest since April 2022, when the firm began tracking this metric as the Fed started raising interest rates to control demand and inflation.
The Wall Street Journal, which has been conducting a survey of academic economists on recession predictions, also reported a decline in recession odds due to signs of abating inflation. According to the survey, there is now a 54% chance of a recession in the coming year, down from 61% in previous surveys.
Most economists surveyed attributed their optimism about the economic outlook to expectations of continued inflation slowdown throughout the year.
If a recession is avoided, it would be a significant achievement for Fed Chairman Jerome Powell, who has expressed some reservations about achieving a “soft landing” where inflation is controlled without triggering a recession.
The Fed has been raising rates since March of last year, aggressively pushing its target rate to 5% to 5.25%.
While it is highly likely that the Fed will raise rates by a quarter of a percentage point at its next meeting in July, some investors and economists believe this hike will signal the Fed’s terminal rate, despite the central bank’s projection of two more rate revisions in 2023.
According to CME Group’s FedWatch tool, investors currently assign a 13% chance of another interest rate hike at the Fed’s September meeting.
“Despite some assertions to the contrary from more hawkish participants, we don’t think the September meeting is truly ‘live,’” Hatzius said on Monday. “Beyond 2023, we think the market is once again building in too many rate cuts, not only relative to our baseline funds rate forecast but also relative to our probability-weighted path.”
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