Goldman Sachs, experts have changed their view on the chance of a recession in the U.S. economy next year, and they’re feeling more positive than before. They used to think there was a 20% chance of a recession in the next year, but now they believe it’s lower at 15%. They’ve got a few reasons for this shift in thinking. One is that inflation seems to be calming down, and the job market is holding up better than expected.
They’re saying this for a couple of main reasons. First, they think people’s incomes will go up in 2024 because more jobs are being created, and wages are increasing. Second, they disagree with the idea that the economy will tank because of delays in the effects of changes in monetary policy.
They also think the Federal Reserve won’t be raising interest rates anymore. They’re saying this because unemployment is going up, wage growth is slowing down, and inflation is balancing.
However, they admit their view is more positive than what most others are saying. Many experts in a Bloomberg survey, for example, think there’s a 60% chance of a different outcome.
This all comes after the government told us a month ago that prices for everyday stuff like gas, groceries, and rent only went up by a little bit in July, 0.2% to be exact. But when you look at the whole year, prices went up by 3.2%, which is faster than before and shows that it’s tough to control inflation.
Inflation Trends and Federal Reserve’s Monetary Policy
Some other parts of the report say inflation is slowing down less quickly than expected, even though the Federal Reserve is being pretty tough with its money policy. Prices that don’t count the more unpredictable things like food and energy went up by 0.2%, which is a 4.7% yearly increase, more than two times what we were used to before COVID-19.
The Federal Reserve has been making it harder to borrow money by raising interest rates a lot in the past year, 11 times to be exact, to try and stop inflation. In just one year, interest rates went from almost zero to over 5%, which is the fastest they’ve gone up since the 1980s. They say they might do more rate increases this year unless they see strong evidence that inflation is really going down. Goldman Sachs, is saying they don’t think the Federal Reserve will increase rates again in September, and even for November, the conditions would have to change significantly for them to consider it.
When Interest rates go up, it usually means that loans for things like houses, cars, and credit cards get more expensive. This can slow down the economy because people and businesses don’t want to borrow as much when it’s more expensive. For instance, the average interest rate on 30-year mortgages has gone above 7% for the first time in many years. Borrowing money for things like home equity lines of credit, auto loans, and credit cards has also become more costly.
Once more interest rates going up, the job market has been surprisingly strong, although there are some signs it might be getting weaker. In August, employers only added 187,000 new jobs, and the unemployment rate unexpectedly went up to 3.8%, the highest it’s been since February 2022.
Goldman Sachs now sees a 15% chance of a U.S. recession next year, down from 20%, citing easing inflation and a resilient job market. They anticipate income growth in 2024 from job expansion and wage increases. They also expect the Federal Reserve to halt interest rate hikes due to rising unemployment, slowing wage growth, and balancing inflation.