Goldman Sachs, a prominent voice in economic discussions, has made a significant adjustment to the likelihood of a U.S. recession. Chief economist Jan Hatzius has reduced the probability of a recession within the next 12 months to 20%, a notable decrease from the median forecast of 54% among other experts surveyed in the Wall Street Journal.

Hatzius explains that recent data has solidified their confidence that a recession will not be necessary to bring inflation under control. With a GDP growth rate of 2.3% annually, consumer sentiment on the rise, unemployment rates decreasing, and jobless claims showing signs of improvement, the economy is displaying positive signs.

However, Goldman Sachs does anticipate some deceleration in the coming quarters. This is primarily due to slower real disposable personal income growth, particularly after taking into account student debt payments resuming in October. Additionally, there may be a drag from reduced bank lending. Despite these factors, Hatzius notes that the easing of financial conditions, the rebound in the housing market, and ongoing growth in factory building all contribute to the belief that the U.S. economy will continue to grow, albeit at a slightly slower pace than desired.

In summary, Goldman Sachs is optimistic about the state of the U.S. economy and its ability to avoid a recession.

The Inverted Yield Curve: What Does It Really Mean?

Introduction

Understanding the Yield Curve

To put it simply, the yield curve illustrates the relationship between short-term and long-term interest rates. In a normal market scenario, long-term rates are higher than short-term rates. This reflects the expectation that investors require a higher return for keeping their money tied up for a longer period.

The Current Yield Curve Situation

Despite recent developments, some economists, like Hatzius, are not overly concerned about the inverted yield curve. Presently, there is a notable disparity between the 2-year yield and the 10-year yield. However, three key factors challenge the notion that a recession is inevitable.

Firstly, the term premium is currently below its long-term average. As a result, it requires fewer anticipated rate cuts to invert the curve. Secondly, there is a foreseeable path towards Federal Reserve easing due to lower inflation. In fact, projections from both our team and the Federal Open Market Committee indicate the likelihood of gradual cuts exceeding 200 basis points in the next 2-3 years. Lastly, if forecasters are overly pessimistic at present, it follows that rates market investors may also be overly pessimistic.

According to Hatzius, these factors imply that viewing the inverted yield curve as a confirmation of recession calls is “circular” reasoning.

Debating the Possibility of a U.S. Recession

While there is disagreement among experts, it is important to acknowledge that concerns regarding a potential U.S. recession have not vanished completely. Deutsche Bank strategist Jim Reid examines past rate hike cycles and reveals that all but one recession took longer to manifest.

For instance, the shortest period between a rate hike cycle and a subsequent recession was 11 months, occurring in the August 1980 to July 1981 time frame. Reid emphasizes the need for caution despite current favorable inflation rates and steady data, as historical lag times suggest a soft landing is possible, but not guaranteed.

Conclusion

As the economy continues to evolve, the debate surrounding the inverted yield curve and its implications persists. While some experts like Hatzius downplay the significance of the inversion, others remain cautious, drawing attention to historical patterns. Regardless of the ultimate outcome, it is crucial for investors to stay informed and responsive to changes in the market.

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