Economists are offering varying perspectives on the U.S. economy’s trajectory, with some anticipating a “soft landing” after two years of elevated inflation, while others are concerned about the potential for a more challenging downturn.

Goldman Sachs’ Optimistic View

Goldman Sachs, known for its economic insights, has recently revised its forecast, reducing the likelihood of a U.S. recession within the next year to just 15%. This adjustment, down from their earlier prediction of 20%, reflects changing dynamics within the U.S. economy.

Jan Hatzius, Chief Economist at Goldman Sachs, attributes this optimism to the easing of inflationary pressures and the remarkable resilience of the job market, even after enduring more than 17 months of rigorous interest rate hikes.

The Soft Landing vs. Recession Dilemma

Consider a plane landing smoothly, where passengers experience minimal disruption compared to a crash landing. Similarly, the Federal Reserve has been striving for an “economic soft landing” through its ongoing campaign of interest rate hikes initiated in March 2022. The aim is to slow economic activity, restore supply and demand equilibrium, and curb the rampant cost of living increases that have characterized recent times.

However, there is a lingering risk that the economy could decelerate to the extent of falling into a recession, mirroring historical patterns following rate hikes. Out of the last nine occasions when the Fed raised rates to combat inflation, the economy eventually entered a recession, most notably during the Great Recession of 2008.

Economists Remain Divided

Economists continue to hold diverse viewpoints on whether history will repeat itself. A recent Wall Street Journal survey of prominent forecasters in July revealed that the odds of a recession stood at 54%, down from 61% earlier in the year, illustrating the ongoing debate.

Goldman Sachs is becoming increasingly confident in its positive outlook, citing recent economic reports indicating subdued inflation and a job market that, though slowing, avoids significant layoffs. Hatzius argues that the likelihood of a recession in the current landscape is no higher than in any typical year, drawing attention to the historical pattern of a recession occurring approximately every seven years since World War II.

ING’s Contrarian Perspective

On the contrary, economists at ING maintain their stance that the Federal Reserve’s persistent campaign of anti-inflation interest rate hikes will eventually lead to a recession in the coming months. Their argument centers on the notion that the Fed’s actions have raised borrowing costs across various sectors of the economy, particularly impacting housing and banking.

Mortgage rates have surged, and the banking sector has witnessed a series of high-profile failures, partly attributed to elevated interest rates. Additionally, the resumption of student loan payments in October is expected to restrain consumer spending, a vital driver of economic growth.

Carsten Brzeski, Chief Economist for the Eurozone at ING, stated, “After spring’s banking turmoil, the debt ceiling excitement, and more generally, the impact of higher Fed rates, the next significant development is the resumption of student loan repayments, beginning in September. Coupled with the delayed impact of other economic factors, these repayments are likely to exert downward pressure on the U.S. economy at the beginning of next year.”

As the economic landscape evolves, experts continue to grapple with uncertainty. Goldman Sachs leads the optimism, while others remain cautious about potential challenges on the horizon.

Photo Source: Google

By: Montel Kamau

Serrari Financial Analyst

6th September, 2023