Goldman slashes US recession risk forecast on solid jobs, fading rate bets

Goldman Sachs Group slashed its outlook for a near-term U.S. recession over the weekend, citing a markedly improved inflation backdrop and a tight labor market. 

Goldman's chief economist, Jan Hatzius, said the bank sees a 15% chance of a U.S. recession over the next 12 months, down from 20% previously and hinted that the Federal Reserve has likely ended its 18-month cycle of rate hikes.

Hatzius also said the impact of the Fed's long run of rate hikes, which has lifted the central bank's benchmark lending rate to a 2007 high of 5.25% to 5.5%, will begin to fade into the end of the year, “before "vanishing entirely by early 2024.”

“First, real disposable income looks set to reaccelerate in 2024 on the back of continued solid job growth and rising real wages,” Hatzius said. “Second, we still strongly disagree with the notion that a growing drag from the ‘long and variable lags’ of monetary policy will push the economy toward recession.”

The Labor Department reported Friday that average hourly earnings grew by 4.3% last month, down from the 4.4% recorded in July but still largely in-line with both core inflation readings and Wall Street forecasts. 

The wage data came alongside another solid, but by no mean spectacular, August employment report that showed 187,000 new jobs were created last month, firmly ahead of the Wall Street consensus forecast of a 170,000 gain, with the headline unemployment rate rising to 3.8%.

The Atlanta Fed's GDPNow forecasting tool, a real-time tracker of domestic growth, suggests the U.S. economy is growing at a 5.6% clip, a modestly reduced pace from the 5.9% it suggested late last month but still well ahead of the official 2.1% advance tallied over the three months ending in June by the Commerce Department