There are 2 big reasons why the chances of a recession in the next year have dropped, according to Goldman Sachs
- The chances of a recession hitting the US economy within the next 12 months have dropped, according to Goldman Sachs.
- The bank lowered its odds of a recession hitting the US economy to 25% from 35% in a Tuesday note.
- These are the two big reasons Goldman Sachs feels more confident about the economic outlook.
A recession hitting the US economy within the next 12 months appears less likely today than it did just a couple weeks ago, according to Goldman Sachs.
The bank's top economist Jan Hatzius lowered the chances of a recession to 25% from 35% in a note on Tuesday. That call goes against a lot of the warnings CEOs and market strategists have issued over the past few months, as many were expecting a recession to happen by the middle of this year.
But ongoing strength in the labor market and solid consumer spending have highlighted the fact that the US economy is a lot more resilient than many think.
Hatzius offered two other reasons why he sees lower odds of a recession, according to the note.
1. A debt ceiling deal has been reached.
A bipartisan debt ceiling bill cleared Congress last week, with President Joe Biden signing the legislation over the weekend. It suspends the debt limit until 2025, essentially removing the possibility of a default happening any time soon.
"The tail risk of a disruptive debt ceiling fight has disappeared," Hatzius said. "The bipartisan budget agreement to suspend the debt limit will result in only small spending cuts that should leave the overall fiscal impulse broadly neutral in the next two years."
Such a default likely would've been catastrophic for the US economy and stock market, with the White House estimating that a full-blown default would eliminate 8 million jobs and result in a 45% decline in stocks.
2. The regional banking crisis is over.
"We have become more confident in our baseline estimate that the banking stress will subtract only a modest 0.4 percentage point from real GDP growth this year, as regional bank stock prices have stabilized, deposit outflows have slowed, lending volumes have held up, and lending surveys point to only limited tightening ahead," Hatzius said.
Those two reasons, combined with the economy getting "a sizable boost" from the stabilization in the housing market and growth in real disposable income give Hatzius confidence in Goldman Sachs' 2023 US economy growth forecast of 1.8%, which is well above consensus.
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