US Recession... Or Not?

US Recession… Or Not?
5/2/22

Is a Recession Coming?

Interest rates are rising and the unemployment rate can’t get much lower. Given these circumstances, it does seem plausible that the Fed’s forthcoming efforts to reduce inflation to more tolerable levels may have the unfortunate side effect of plunging the US economy into recession. A Goldman Sachs note addresses this possibility, and has a reasonably optimistic conclusion that while a recession is possible within the next 2 years, it is more likely that the US will avoid that fate.

Goldman’s preferred employment metric is the jobs-workers gap, which means (employment + job openings) – (total number of workers). Goldman offers a chart showing that this metric is in uncharted territory:

The article estimates that the jobs-workers gap needs to shrink by half (about 1% of the US adult population, or 2.5 million workers) to cut wage growth from 5%-6% to 4%-4.5%; this level of wage growth is then likely to be reasonably consistent with a 2%-2.5% inflation rate.

How do we get there? The article suggests an outcome in which employers delay expansion and close some job openings, without enacting layoffs; GDP growth would cool in this scenario to about 1%-1.5%. The critique of this argument is that whenever US unemployment has risen by over 0.35% on a 3-month average basis, the US economy has gone into recession. Although other countries have been able to slow their economies without provoking a recession, the US nonetheless has a fine line to walk.

Perhaps the best hope in avoiding a recession is that Americans still have a large stockpile of savings from the pandemic assistance bills. If the extent of any layoffs is modest and their impact absorbed by excess savings, then the US economy might be able to withstand interest rate hikes and achieve a soft landing. Goldman Sachs is cautiously optimistic—they estimate a 15% chance of a recession within the next 12 months, and a 35% chance within the next 24 months.

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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.