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'One immediate reason' why Goldman Sachs sees relatively low recession risk
17 Nov 2022
The stock may be back in rally mode over the last couple of weeks, but most Wall Street economists are still predicting some degree of recession in 2023.
Bucking that trend is Goldman Sachs Chief Economist Jan Hatzius, who estimates that there is a 35% chance of a recession next year — below consensus forecasts for 65%.
"One immediate reason is that the incoming activity data are nowhere close to recessionary," Hatzius wrote in a note breaking down his contrarian call. The Goldman team sees U.S. GDP rising by 1% in 2023.
Hatzius highlighted consumer incomes as a key catalyst.
"There are strong reasons to expect positive growth in coming quarters," he wrote. "To be sure, the tightening in financial conditions is weighing heavily on growth, to the tune of nearly 2 percentage points at present. But real disposable personal income is rebounding from the plunge seen in the first half—when fiscal tightening and sharply higher inflation took their toll—to a pace of 3%+over the next year."
The U.S. economy has remained somewhat resilient in the face of persistent inflation, slowing job growth, and aggressive interest rate hikes by the Federal Reserve. Third quarter GDP came in at 2.6% annualized, marking the first positive quarter of growth for 2022.
"And while there are risks on both sides," the Goldman note stated, "we think the real income upturn is likely to be the stronger force as we move through 2023, especially because the financial conditions drag will likely diminish assuming Fed officials do not deliver dramatically more tightening than the rates market is currently pricing."
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