Goldman Sachs (NYSE:GS) has revised its assessment of the likelihood of a US recession within the next 12 months, lowering the probability from 25% to 20%.
Although this figure remains slightly above the average postwar probability of 15% for a recession occurring approximately every seven years, it is significantly lower than the median of 54% reported by forecasters in the recent Wall Street Journal survey.
Goldman believes that the Federal Reserve’s push to bring down inflation does necessitate a complete economic recession, noting that the resilience of the US economy is evident as various indicators portray ongoing strength.
In the second quarter, gross domestic product growth stood at 2.3%, consumer sentiment experienced a sharp rebound from previously depressed levels, and unemployment retreated to 3.56% in June.
Furthermore, initial jobless claims have reversed their recent mini-spike.
While some deceleration is expected in the coming quarters, primarily due to a slowdown in real disposable personal income growth, especially when adjusted for the resumption of student debt payments in October, and reduced bank lending exerting a drag, overall financial conditions have eased.
The housing market has rebounded, and there is a flourishing boom in factory building, all of which suggest that the US economy will continue to grow, albeit at a pace slightly below the trend.
Contrary to the widespread concern surrounding yield curve inversion, Goldman Sachs (NYSE:GS) does not share the same apprehension.
The investment bank explained: Conceptually, an inverted curve means that the rates market is pricing future cuts that are large enough to outweigh the term premium (which accounts for the usual upward slope).
“In the past, this has generally only happened in situations when a recession was becoming clearly visible - hence the curve’s strong track record as a recession predictor. But three things are different about the current cycle," Goldman said.
“First, the term premium is well below its long-term average, so it takes fewer expected rate cuts to invert the curve. Second, there is a plausible path to Fed easing just on the back of lower inflation… Third, if forecasters are overly pessimistic now, rates market investors – and thus the expectations priced into the yield curve – are probably also overly pessimistic.”
Beyond 2023, Goldman Sachs believes the market may be anticipating an excessive number of rate cuts compared to their baseline funds rate forecast and probability-weighted path.