For the last year, forecasters have been warning of a recession in the US – caused by one of the sharpest and most aggressive tightening cycles of monetary policy in history. Yet recent data appears to suggest that the elusive “soft landing” for the US economy is becoming more likely.
The tightening of interest rates operates with a lag of around 12-18 months, so it’s still too early to tell whether a recession remains on the cards, but the signs are looking brighter. Goldman Sachs recently reduced their probability of US recession in the next 12 months from 20% to just 15% (see chart below).
The last couple of months have seen encouraging inflation and labour market news. The underlying inflation trend has slowed considerably in recent months across several measures (core, trimmed mean, and median), and both core CPI and core PCE inflation are expected to continue declining on a year-on-year basis through the end of 2024.
In addition, the gap between available jobs and workers has now essentially returned to pre-pandemic levels, indicating that the labour market is back in balance even as the underlying pace of job gains remains strong.
Continued progress on disinflation and labour market rebalancing, together with US Federal Reserve (Fed) Chair Powell’s promise at Jackson Hole to “proceed carefully”, has led the market to become more confident that the Fed is done (or very nearly done) raising rates. Indeed, while the resumption of student loan payments and the recent rise in mortgage rates are likely to contribute to a deceleration in growth in Q4, this slowdown will likely be shallow and short-lived given expectations that real disposable income growth will reaccelerate next year and the drag from monetary tightening will vanish entirely by early 2024.
Source: Goldman Sachs
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