The stock market is reeling and most economists expect a painful recession—but Goldman Sachs says a ‘soft landing’ is still achievable

The Federal Reserve is engaged in a battle against inflation and the effects of its policies increase the chances of a recession. But the outcome for the US economy is far from final.

Economists use an airplane analogy to describe what the US is facing, arguing that the Fed is trying to slowly turn off the engine of the economy, thus reducing inflation and ensuring a “soft landing”.

Some even argue that the Fed faces an impossible task in its fight against inflation, and that a “hard landing,” also known as a recession, is inevitable.

But Jan Hatzius, chief economist at Goldman Sachs, said in a research note on Monday that he believes a soft landing is still possible, even if the flight path is bumpy.

Hatzius argues that the US economy can avoid the worst economic outcomes if it experiences 1) “below trend” growth, 2) a “labour market rebalancing” involving rising unemployment, and 3) a substantial decline in inflation. .

While Goldman economists still argue there’s a one-in-three chance of a mild US recession over the next year, Hatzius said on Monday he’s seeing “encouraging signs” that the economy is moving toward these three targets, and a soft landing. .

Moving in the right direction

First, there is growing evidence that inflationary pressures are easing, particularly when it comes to product prices. And that trend is likely to continue, Hatzius said.

“Dramatically lower commodity prices, a stronger dollar, and large improvements in supply chain disruptions suggest that goods price inflation will continue to decline,” he wrote.

Second, US economic growth is in the midst of a “slowdown” that is critical to bringing down inflation. Hatzius noted that the Fed’s interest rate hikes have pushed the 30 year average fixed mortgage rate in the US above 6%, which should help cut spending and, in turn, consumer prices.

“Overall, we are comfortable with our forecast that US growth will remain well below trend over the next year,” Hatzius wrote.

Finally, Hatzius pointed out that the labor market is starting to cool down. The number of available jobs per worker, also known as the gap between jobs and workers, has shrunk by 700,000 in the past four months, and real wage growth is slowing.

That’s “encouraging” news for the Fed’s fight against inflation, the economist argued, as “the balance between supply and demand” in the labor market is beginning to improve.

If these signs continue to trend in the right direction, it could allow the Federal Reserve to slow the pace of its interest rate hikes, or even stop them altogether, boosting the economy and asset prices.

Standing out from the crowd

Hatzius’ view that a soft landing is still possible puts him on the fringes of the investment banking world.

Many of the major investment banks argue that a recession is now the most likely outcome for the US economy. And some have gone a step further, making a US recession their “base case” for the next 12 months.

german bankfor example, has argued since April that a “major” recession is unavoidable in the US AND Bank of America said in July that he now suspects a “mild recession” is coming this year.

Scott Wren, Senior Global Market Strategist at fargo wellsalso wrote in an Aug. 31 research note that the Fed’s tough stance against inflation, which was emphasized by Chairman Jerome Powell aggressive comments at the Fed’s annual conference in Jackson Hole, Wyoming.last week, will finally trigger a recession.

“Fed spokesmen say they are more than willing to give up a good degree of economic growth to reduce inflation. We believe that will likely result in a recession and a higher unemployment rate,” he wrote.

Nomura Senior US Economist Rob Dent also said in a research note on Friday that he expects a recession to start in the fourth quarter of this year as “entrenched inflation” will force the Fed to keep raising rates even when the economy weakens.

And the UBS tool for determining the likelihood of a US recession, which is based on three economic models: a hard economic data model that takes into account hard data such as the unemployment rate and retail sales, a which follows the US Treasury bond yield curve and a model based on available corporate credit data also shows a recession is imminent. Over the summer, the probability of a recession based on these three models increased 20 percentage points to 60%.

Still, Hatzius is far from the only Wall Street economist to argue that a recession is not guaranteed.

“I can see ways the economy could still muddle through and avoid a recession over the next year,” said Bill Adams, chief economist at LPL Financial. Fortune In the past week.

Adams said that if commodity prices fall substantially from their recent highs, the Fed could slow the pace of its interest rate hikes in coming quarters, allowing for a soft landing.

However, he noted that “the path to that outcome is much narrower than it seemed six months ago.”

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