Jan Hatzius Thinks the U.S. Will Avoid a Recession
The July hike in rates will be their last, according to a new forecast by Goldman Sachs’ chief economist, Jan Hatzius. In an analyst note dated July 17, Mr. Hatzius reduced his forecast for a recession over the next 12 months to only 20% from an already lower tha peers 25%, citing inflation that has dropped precipitously over the past year.
“We are cutting our probability that a US recession will start in the next 12 months further, from 25% to 20%,” 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 forecast follows the previous weeks CPI and PPI reports that show both had decelerating price increases from previous periods, with consumer prices up just 3% from a year ago. The report pointed to a faster-than-expected decline in core inflation, which showed to a 4.8% increase from a year earlier. Core inflation readings don’t include food or energy prices that may be up or down based on factors unrelated to economic strength or weakness.
With inflation on the run, economists don’t expect the Fed to stop short of finishing the job. On July 25-26 next week the Federal Reserve is widely expected to adjust rates up another quarter-percentage point. Goldman’s Hatzius wrote he expects this will be the final increase in the Fed’s tightening cycle.
“We do expect some deceleration in the next couple of quarters, mostly because of sequentially slower real disposable personal income growth — especially when adjusted for the resumption of student debt payments in October — and a drag from reduced bank lending,” he wrote.
Monetary policymakers have raised interest rates sharply over the past year, approving 10 straight rate hikes in the span of one year to lower inflation that was as high as 9%. In a little over a year, the base overnight bank lending rate was pushed up from near zero to near 5.25%, the fastest pace of tightening since the 1980s. If Hatzius and many other economists are correct, Officials are expected to approve an 11th rate hike at the conclusion of their two-day meeting next week, the FOMC did not raise rates at the June meeting, choosing to assess the economy for a longer period before deciding.
Increased interest rates elevates costs on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates have helped push the average rate on 30-year mortgages above 7% from half that level a couple of years back. Borrowing costs for everything from home equity lines of credit to auto loans and credit cards have also spiked. This helps slow demand, less demand is less inflationary.
The labor market has remained strong despite the Fed’s assault on business conditions. Taken all together Goldman Sachs is more bullish on a soft landing for the US economy.
“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,” he wrote. For context the average recession expectation has been 15% since WWII. Hatzius’ adjusted forecast is still above the average of 15%, but well below the median forecast on Wall Street, of 54%.
According to the note, encouraging CPI data is not a trend set to fizzle out, as fundamental signals highlight further disinflation to come, “Used car prices are sliding on the back of higher auto production and inventories, rent inflation still has a long way to fall before it catches up with the message from median asking rents, and the labor market has continued to rebalance with an ongoing downtrend in job openings, quits, reported labor shortages, and nominal wage growth,” wrote Goldman’s Hatzius.
Take Away
No economist has a crystal ball, but when Goldman Sachs issues a note, the markets pay attention. In its note this week it reports expectations that the odds of a recession in the next year have fallen to just 20%, citing encouraging economic data, including, employment, consumer sentiment and slowing inflation. Goldman’s senior economist expects just one remaining interest rate hike in the Federal Reserve’s tightening cycle, and that is expected in July.
Managing Editor, Channelchek
Sources
https://www.foxbusiness.com/economy/goldman-sachs-trims-us-recession-odds-next-year