Goldman Sachs Research has downgraded the risk of a U.S. recession in the coming year from 35% to 25%, following a decreased likelihood of a debt-ceiling dispute and the relatively minimal economic impact of banking sector stress. The increase in the debt limit, accompanied by minor spending cuts, is not expected to significantly change the economic trajectory over the next two years, even though regional banks’ turbulence could reduce the real GDP growth by 0.4 percentage points this year.
The report also highlights a surge in the growth of real disposable income and a stabilizing housing market, which are boosting the U.S. economy. Goldman Sachs Research predicts a higher than average economic growth of 1.8% this year.
Despite the growth of nonfarm payrolls and the unemployment rate remaining close to pre-pandemic levels, the Federal Reserve might need to instigate a recession to achieve its 2% inflation target. However, various labor market indicators, such as a decline in labor shortages and cooling wage growth, show a promising scenario.
Goldman Sachs’ economists also noted the deceleration of inflation across numerous indicators, with expectations of core PCE inflation dropping to 3.7% by December 2023. Improvements in supply chains and declining used-car prices are projected to significantly reduce core goods inflation from June onwards. Despite a rebound in house prices, asking rents appear to be falling, which, along with labor market rebalancing, should reduce core service inflation excluding shelter.
