Goldman Sachs believes U.S. will avoid recession, progress toward a soft landing

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By Sam Boughedda

In a note to clients Tuesday, Goldman Sachs analysts said that the firm's most out-of-consensus forecast for 2023 is its call that the U.S. will avoid a recession and continue progressing toward a soft landing.

The analysts explained that the forecast, in part, reflects its view that a period of below-potential growth is enough to gradually rebalance the labor market and dampen wage and price pressures.

"It also reflects our analysis that indicates that the drag from fiscal and monetary policy tightening will diminish sharply next year, in contrast to the consensus view that the lagged effects of interest rate hikes will cause a recession in 2023," Goldman Sachs said.

Furthermore, they state that they see the first steps in the rebalancing process this year as quite successful, with the jobs-workers gap shrinking "quickly at little cost, with all of the decline in labor demand coming from a drop in job openings." However, the analysts believe there is "much further to go in 2023."

The analysts continued that the supply chain recovery and the deflationary impulse in the goods sector that it promised to bring, took much longer than expected but has finally arrived, and they expect this ongoing process to "push core goods inflation negative next year, driving most of the decline in overall core inflation."

"This should help to push elevated short-term inflation expectations back toward normal levels," Goldman Sachs. "We expect the FOMC to deliver 25bp rate hikes in February, March, and May and then to hold the funds rate at 5-5.25% for the rest of 2023."

"We are skeptical that the FOMC will cut the funds rate until the economy is threatening to enter recession, and we do not expect this to happen next year."