Goldman warns US recession risk now higher

And more front-loaded.

Goldman Sachs economists cut their US growth forecasts and warned that the risk of recession is rising.

The Goldman team now sees a 30% probability of entering a recession over the next year, up from 15% previously, and a 25% conditional probability of entering a recession in the second year if one is avoided in the first, they wrote in a Monday research note. That implies a 48% cumulative probability in the next two years versus 35% previously.

“We now see recession risk as higher and more front-load,” economists led by Jan Hatzius wrote in the note. “The main reasons are that our baseline growth path is now lower and that we are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply.”

Seeking to quell the surge in living costs, the US Federal Reserve accelerated its monetary-tightening campaign last week, executing the biggest interest-rate hike since 1994.

While comparisons with the 1960s and 1970s are ringing louder, the Goldman economists said hot wage growth and high inflation expectations are less entrenched today as back then.

“What might a recession look like? With no major imbalances to unwind, a recession caused by moderate overtightening would most likely be shallow, though even shallower recessions have seen the unemployment rate rise by about 2½percentage points on average,” the Goldman economists wrote. “One additional concern this time is that the fiscal and monetary policy response might be more limited than usual.”

While the economists maintained their second quarter growth forecast of 2.8%, they cut their outlook from the third quarter of this year through to the first quarter of 2023, and now forecast growth of 1.75%, 0.75% and 1%, respectively, in each of those quarters.

© 2022 Bloomberg L.P.

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