Goldman Sachs said the odds of a recession are shrinking yet again after recent reports showed inflation is meaningfully falling, good news for President Joe Biden's reelection prospects.
Goldman Sachs Chief Economist Jan Hatzius on Monday put the prospect of a recession in the next 12 months at just 20%, down from 25% the month before. The financial services giant previously pruned its forecast from the 35% level it announced in March amid the collapse of Silicon Valley Bank and turmoil in the banking system.
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“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.”
The updated recession odds are another bit of good news for Biden and the White House, which has been working to re-purpose the phrase "Bidenomics" into a political slogan for all of the bright spots of the economy. The administration recently touted the lower inflation readings coupled with the strong jobs market as proof that the economy is in good shape. A recession in 2024 would imperil Biden's reelection.
The June consumer price index report, released last week, showed that inflation fell to a 3% annual rate, representing a decline of a whole percentage point from the preceding month. Last Thursday’s producer price index, which measures wholesale prices, showed that inflation came in at just 0.1% for the year ending in June.
The reports show the Federal Reserve is making unexpected progress in driving down inflation, even as the U.S. labor market remains strong and unemployment hovers near historically low levels.
Goldman’s recession odds are now the lowest they have been since April 2022, right around when the firm began tracking the metric as the Fed started to raise interest rates in order to tamp down demand and squelch inflation.
The Wall Street Journal, which has been keeping a running survey of academic economists and their predictions about a recession, announced this weekend that their survey’s recession odds have also declined with signs that inflation is abating.
There is now a 54% chance of a recession in the coming year, according to the economists in the study, down from the 61% level notched in the previous two surveys.
Nearly 60% of the economists surveyed said that expectations for inflation to keep slowing this year is the driving factor behind their optimism about the improving economic outlook.
If a recession is avoided, it would be a major feat for Fed Chairman Jerome Powell, who even himself has expressed some hesitations about whether the central bank could pull off a so-called soft landing, which is when inflation is tamed without the economy falling into a recession.
The Fed has been hiking rates since March of last year and has driven up its target rate, at times very aggressively, to 5% to 5.25%.
It is a near certainty that the Fed will raise rates again by a quarter of a percentage point at its next meeting in July, although an increasing number of investors and economists now expect that hike will signal the Fed’s terminal rate — despite central bank officials themselves penciling in two more rate revisions in 2023.
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Investors now assign just about a 13% chance that the Fed will conduct another interest rate hike at its September meeting, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
“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.”