US Economy Remains on Track to Avoid Recession With Soft Landing: Goldman Sachs

A view of the Goldman Sachs stall on the floor of the New York Stock Exchange on July 16, 2013. Brendan McDermid/Reuters

Goldman Sachs economists believe the U.S. economy is still on track to avoid a recession, albeit via a narrow path, citing improved inflation levels and supply chain pressures.

Economists led by Jan Hatzius wrote Sunday that better inflation figures along with adjustments to the jobs market have reduced the risk that the Federal Reserve will have to aggressively raise interest rates to the point that it could force the country into a recession, Bloomberg reports.

The U.S. economy added 390,000 jobs in May, beating economists’ estimates of 328,000, data released by the Bureau of Labor Statistics (BLS) showed. But while employment growth was better than anticipated, it was still the slowest monthly gain since April 2021.

Meanwhile, April’s annual inflation came in at 8.3 percent, just shy of the 40-year high of 8.5 percent in March.

While the “deterioration” in indicators such as the first-quarter decline in U.S. gross domestic product “suggests that near-term recession risk has increased in a mechanical sense,” Goldman economists wrote, other activity measures “imply that output is still expanding.”

The U.S. economy contracted at an annualized pace of 1.4 percent in the first quarter, falling short of market expectations of 1.1 percent growth.

Back in May, Federal Reserve Chair Jerome Powell said that ongoing supply chain disruptions and “huge geopolitical vents going on around the world,” could prevent the Fed’s attempt at a “soft landing” in which a recession could be avoided.

“It’s a very challenging environment to make monetary policy,” Powell said in an interview on NPR’s “Marketplace.”

“Our goal, of course, is to get inflation back down to 2 percent without having the economy go into recession, or, to put it this way, with the labor market remaining fairly strong.”

A report published in May by the Congressional Budget Office (CBO) predicts inflation will remain elevated in 2022 at 4 percent, driven by strong demand and supply constraints across goods, services, and labor.

Goldman Sachs economists noted Sunday that “in terms of near-term communication, there is little incentive for Fed officials to deviate from their relatively hawkish framing of the last few months.”

Speaking to NPR, Powell doubled down on his expectation that there would be additional 50-basis point increases at the next two Fed meetings but noted that “if things come in better than we expect, then we’re prepared to do less. If they come in worse than when we expect, then we’re prepared to do more.”

When asked about whether the Fed would consider a 75-basis-point hike, Powell declined to comment but said that policymakers would “adapt to the incoming data and the evolving outlook.”

Asked about his plan for a so-called “soft landing” Powell admitted “It will be challenging, it won’t be easy,” adding that it “would have been better” to have started raising rates earlier than in March.

“So the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control. But we should control the controllable. And what we control is there’s a job to do on demand, demand is out of whack with supply.”

Experts, however, have warned that the U.S. economy could be heading into recession in the next one to two years.

However, David Kelly, chief global strategist at JPMorgan Asset Management told CNBC’s “Squawk on the Street“ last week that he also anticipates a soft landing, citing improved labor force growth and wage growth, while urging the Fed to be patient because ”we are actually on the right path here.”

Tom Ozimek contributed to this report.