One of the key debates around the health of the US economy is whether a soft landing is in sight. After avoiding a recession and with markets ending on a high note in 2023, the US Congressional Budget Office declared in December that “[b]y many measures, the economy looks like it is headed for a soft landing.”
Likewise, Goldman Sachs Wealth Management Investment Strategy Group (ISG) is expecting a soft landing this year. However, recession risks remain above average. Here’s why.
Recession risk is lower compared to last year but uncertainty persists
ISG’s recession probability is 30% over the next 12 months, which is still somewhat elevated due to persistent uncertainty around still-inverted yield curves (a signal that the market as a whole is becoming more pessimistic about the economic prospects for the near future); the lagged impact of past monetary tightening; and potential pandemic distortions that may compromise previously reliable recession signals.
Despite the risks, ISG expects GDP to grow at a trend-like pace of 2.1% in 2024, supported by three factors:
A robust household sector (considering consumer spending accounts for nearly 70% of US GDP)
Stable investment
Gradually easing financial conditions (a benchmark of forces that impact the economy)
Our ISG colleagues believe consumer consumption will grow at around 2% this year, likely to be driven by rising real incomes.
ISG sees an optimistic economic scenario for 2024, but is that enough for a soft landing? To answer that, it may be helpful to first understand when economists would truly call a recession.
When is a recession, truly a recession?
The typical textbook definition of a recession is when real GDP declines over two consecutive quarters. It is a method maintained by some economists, but the official process to call a true recession is more complicated and requires a holistic analysis of economic activity.
The National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee is the official scorekeeper of recession. The Committee defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”
The NBER Committee not only considers GDP data before deciding to call a recession, but they also analyze trends in economic activity including employment, income, sales, and industrial production.
Another widely cited indicator is the “Sahm rule”, named after economist Claudia Sahm. It states a recession is likely underway if the three-month moving average of the unemployment rate rises by at least 0.5% – or 50 basis points – relative to its lowest point in the previous 12 months. As of January, the indicator stands at 0.2% — which improved versus the December reading — meaning there is no current indication of recession based on this metric.
Is US heading towards a soft landing?
Defining a “soft landing” isn’t straightforward either, but an economist at the St Louis Federal Reserve offered the following explanation: “A soft landing is when [the Fed] increase[s] interest rates and manage[s] to decrease inflation, but without causing unemployment to go up drastically and GDP growth to go negative.”
Conversely, a hard landing would occur if the Fed increased interest rates which led to a decrease in inflation but at the cost of a recession and high unemployment.
The Fed’s rate hike campaign to date has managed to lower the inflation rate. ISG expects inflation to continue its downward trend and average around 2.5% this year. ISG also anticipates four 25-basis-point Federal Reserve rate cuts this year, but following the January FOMC commentary, they have pushed back their expectation for the first rate cut to May (from March previously).
Wages are currently growing at a rate above the Fed’s comfort level, but the labor market has made substantial progress towards rebalancing with job openings and quit rates approaching pre-pandemic levels, without a significant rise in the unemployment rate.
ISG expects these rebalancing dynamics to continue through 2024, predicting a modest increase in the unemployment rate from 3.7% to 4.1%.
Considering all factors, ISG sees a runway for a soft landing but cautions that seatbelts should remain fastened until we reach the gate.
This material represents the views of the Investment Strategy Group (ISG) in Goldman Sachs Asset & Wealth Management (AWM) and is not a product of Goldman Sachs Global Investment Research (GIR). It is not research and is not intended as such. The views and opinions expressed by ISG may differ from those expressed by GIR, LP, or other departments or businesses of Goldman Sachs. Past performance is not indicative of future results which may vary.
