Jeff Cox
CNBCOctober 24,2022
There may be a path to a soft landing after all. At least that’s what economists think at Goldman Sachs, which said the Federal Reserve still stands a 65% chance of keeping the economy out of a recession while bringing inflation back down to sustainable levels. In a pair of client notes filed Sunday, the Wall Street firm pinned its case on two pillars — that the labor market is beginning to come back into balance between supply and demand, and that wage growth is cooling enough in two key sectors to suggest that a wage-price spiral can be thwarted.
“The odds that a recession will prove necessary have fallen a little because the first two steps of the required adjustment — slowing GDP growth to a below-potential pace and rebalancing supply and demand in the labor market — have gone remarkably well so far,” Goldman economist David Mericle wrote.The Goldman case is loaded with caveats, in particular that global events could overtake domestic efforts to lower cost, and that the Fed still may get carried away with tightening policy and cause what the firm termed an “unnecessary recession.”
Still, the firm said that recent data on inflation and from the labor market point to the possibility that while growth will be anemic through 2023, the worst-case scenario can be avoided. “So far, slowing growth and rebalancing the labor market is going better than expected,” Goldman economist Joseph Briggs wrote in a separate note. “Industry-level data strongly suggests that the path to a soft landing assumed in our baseline economic forecast is possible.”More optimistic than most Goldman assigns a 35% probability that the economy enters a recession in the next 12 months. The firm expects GDP growth of just 0.3% this year and 1.1% in 2023.
While that is well above what would be expected in normal times, it’s actually more optimistic than some forecasts. The CNBC All-America Survey for the third quarter, released last week, showed that 68% of respondents expect the U.S. to enter recession soon, while 9% think the nation is already there. (The survey polled 800 registered voters and has a margin of error of plus or minus 3.5 percentage points.) Briggs said inflation-adjusted spending in the retail trade and accommodation and food services industries indicates consumers are pulling back. At the same time, the available jobs-to-workers gap is narrowing, and wage growth and price inflation are cooling as well, though still running at elevated levels.
“Case studies on the retail trade and accommodation and food services industries strongly suggest that the path to a soft landing assumed in our baseline economic forecast is possible,” Briggs wrote. Data from other industries, though, isn’t as encouraging. Labor market conditions are “extremely imbalanced” in industries such as wholesale trade, professional and business services, as well as health care and social assistance, Briggs noted. Even with those imbalances, though, he said progress overall “generally supports the prospects of a soft landing.”
Likewise, Mericle said odds of a Fed-induced recession through excessive interest rate hikes “have likely risen somewhat.” He also said that the odds of a recession from “some unforeseen factor” also are “somewhat higher than usual” while geopolitical risks “are also higher than usual.”Markets will learn more about inflation and the state of the broader economy later this week.
Third-quarter GDP numbers will be out Thursday, with the Dow Jones consensus looking for growth of 2.4% after two straight negative readings in the first half of the year. Personal consumption expenditures inflation, the Fed’s preferred metric, hits on Friday, with expectations for 5.2% growth in core inflation year-over-year in September, up from 4.9% in the prior month.