Chance of US recession falls as economy shows resilience

The probability of a contraction in the world's biggest economy over the next 12 months has come down to 20%, from an earlier projection of 25%

A shopper at a store in Miami. The US consumer price index report showed that inflation fell to its lowest annual rate in more than two years in June. AFP

The probability of the US slipping into recession has dropped further as stronger second-quarter data suggests that the world’s biggest economy remains resilient, Goldman Sachs has said.

The chance of a contraction in the US over the next 12 months has come down to 20 per cent, from an earlier estimate of 25 per cent, the investment bank said in its latest report.

This is the second downward revision in less than a month after Goldman Sachs reduced its estimate on the probability of recession taking hold in the US to 25 per cent in the first week of July, citing only a modest economic impact from banking sector distress in the country.

The latest estimate remains slightly above “the unconditional average post-war probability of 15 per cent – a recession has occurred approximately every seven years – but far below the 54 per cent median among forecasters in the latest Wall Street Journal survey, which is down from 61 per cent three months ago”, said Jan Hatzius, chief economist and head of research at Goldman Sachs.

“The main reason for our cut is that the recent data [has] reinforced our confidence that bringing inflation down to an acceptable level will not require a recession.”

Earlier this month, economists at the bank projected annual average growth this year of 1.8 per cent, well above the consensus of private-sector economists and projections from the US Federal Reserve.

Economic activity in the US remained resilient in the second quarter, with the gross domestic product tracking 2.3 per cent growth.

Consumer sentiment has also rebounded sharply from depressed levels while unemployment has fallen back to 3.56 per cent in June, and initial jobless claims have also reversed their most recent sharp increase, Goldman Sachs said.

“We do expect some deceleration in the next couple of quarters, mostly because of sequentially slower real disposable personal income growth – especially when adjusted for the resumption of student debt payments in October – and a drag from reduced bank lending,” Mr Hatzius said.

“But the easing in financial conditions, the rebound in the housing market and the ongoing boom in factory building all suggest that the US economy will continue to grow, albeit at a below-trend pace.”

US Treasury Secretary Janet Yellen on Tuesday discounted the probability of a recession in the US, despite China’s economic slowdown risks causing ripple effects across the global economy.

Growth in the US has slowed “but our labour market continues to be quite strong – I don’t expect a recession”, Ms Yellen said in an interview with Bloomberg.

The economy is on a “good path” to bring inflation down without a major weakening in the labour market, she said.

US inflation slowed more than expected in June, to 3 per cent, from 4 per cent in May, with annual headline consumer prices rising at their slowest pace since March 2021.

Cooling inflation has increased the probability of one or two more interest rate increases from the US Federal Reserve by the end of this year before it ends it monetary tightening cycle that began in March 2022, resulting in rates being raised by a collective 500 basis points.

The US central bank aims to bring inflation down to its 2 per cent target range and ffficials at the Fed expect the federal funds rate to reach 5.6 per cent this year, up from its previous projection of 5.1 per cent.

Although a 25-basis point increase at the July 25 to July 26 Fed meeting is “almost certain”, Goldman Sachs expects it to be “the last of the cycle”.

“Despite some assertions to the contrary from more hawkish participants, we don’t think the September meeting is truly ‘live’”, Mr Hatzius said..

In contrast to the assessment of Goldman Sachs, Bank of America is predicting a recession will begin in the third quarter of this year, which could lead the unemployment rate to rise to 4.7 per cent in early 2024.

Deutsche Bank has forecast that a recession will begin in the final months of this year, with unemployment rising to about 5.5 per cent in the second quarter of 2024 as the Fed continues to raise rates to tame inflation.