The steps toward avoiding a recession include moderating economic activity, slowing nominal wage growth, easing inflation and rebalancing the labor market.
The transition to growth that’s below trend but still positive “has already occurred, and it looks durable,” Jan Hatzius, Goldman Sachs’s chief economist, wrote in a note.
Soft Landing
The most encouraging data behind a narrow path to a soft landing — a scenario where inflation eases but the economy continues to grow — has been the slowdown in nominal wage growth, according to Hatzius.
A Goldman measure of hourly earnings that removes distortions such as the collapse and rebound of the restaurant sector has slowed significantly compared with last year, he said in the note. Another internal gauge that aggregates business surveys on wage changes has fallen — although it’s still above the 3.5% rate Goldman deems consistent with sustained 2% price inflation.
Other signs that indicate a recession isn’t inevitable include the October payroll numbers, whose robustness was partly due to a boost from a statistical adjustment called the birth-death model.
In addition, various measures of prices show there are reasons to expect lower inflation, Hatzius wrote. He cited the supplier deliveries and prices paid components of Institute for Supply Management surveys, used-car auction prices and asking rents on new leases.
The views are an outlier on Wall Street. An increasing number of economists think it will take a recession for the Fed to achieve its aim of cooling price pressures. The probability of a downturn over the next 12 months stands at 60%, up from 50% odds in September and double what it was six months ago, according to a Bloomberg survey of economists last month.
Fed Chair Jerome Powell himself has said it was still possible the US could avoid a recession though he acknowledged that the window for doing so has narrowed give how persistent inflation has proven to be.
While the US may escape a recession, the euro area and in the UK won’t, according to Goldman.
Hatzius estimates that a recession will probably start in the fourth quarter in the euro zone, and it probably started last quarter in the UK. The key difference is real disposable household income, which will probably fall further in Europe, “largely because of the much bigger and more drawn-out increase in home heating bills.”
