Nowhere near a recession

The US economy is nowhere near a recession, Goldman Sachs’ top economist says

By Matt Egan

The soft landing that once looked nearly impossible for the Federal Reserve to pull off is still on track. That’s the message from Jan Hatzius, the chief economist of Goldman Sachs.

“Certainly, it doesn’t look like the economy is anywhere close to a recession,” Hatzius told CNN.

Even though he concedes inflation has come in hotter-than-expected so far this year, the Goldman economist is sticking by his prescient call for a soft landing.

“If I look at the news flow overall over the last year, it’s still very, very positive,” Hatzius said. “Inflation has come down very substantially over that period. And more importantly, it’s come down without significant weakness in activity. We haven’t seen a recession. We haven’t been close to a recession.”

To fight inflation, the Federal Reserve spiked interest rates in 2022 and 2023 at the fastest pace since the 1980s under legendary Fed chief Paul Volcker.

Many feared that war on inflation would cause unemployment to surge and short-circuit the economic recovery from Covid-19. At one point in the fall of 2022, a model by Bloomberg projected a 100% risk of a US recession over the following 12 months.

Now, many economists are in the soft landing camp as consumer spending and the jobs market have proven to be much more resilient than anticipated.

Hatzius told CNN he’s “pretty confident” there won’t be a US recession over the next 12 months, placing just a 15% risk of a downturn. That’s more or less the average recession risk on any given year.

That upbeat forecast should be a relief to those in the White House trying to sell voters on President Joe Biden’s economic message. A recession could doom that effort.

Since 1900, all five president running for reelection who had a recession in the year they ran for reelection lost, according to TD Cowen Washington Research Group. (Those five presidents were William Howard Taft, Herbert Hoover, Jimmy Carter, George H.W. Bush and Donald Trump.)

What could accelerate rate cuts

Hatzius told CNN that inflation will likely have cooled enough by June to pave the way for the Fed to start cutting interest rates. That would help ease high borrowing costs on everything from mortgages and car loans to credit cards.

“Our forecast and current market expectation is that the first cut comes in June, but it’s going to be data dependent,” Hatzius said.

The Fed could speed up interest rate cuts if the historically-strong jobs market starts to weaken.

“If we were to see more pervasive signs of labor market deterioration, I’d say it becomes more urgent to move,” Hatzius said.

Even as hiring has remained sturdy, the unemployment rate climbed to 3.9% in February, up from the historic low of 3.5% as recently as July 2023.

Hatzius said that if the unemployment rate moves into the low-4% range, that would make officials inside the Fed nervous enough to start pulling forward their rate cut plans.

Unknown unknowns

Even though recession risks have eased, there are always wildcards that could change the picture quickly.

Surging gas prices just hit a significant milestone

“Almost by definition, I think shocks are negative. Now what am I worried about? Geopolitics would certainly be high up on the list,” Hatzius said. “We live in a much more unstable world with military conflict, the war in Ukraine, the war in the Middle East, more tensions between the US and China.”

And then there are the unknown unknowns, as Donald Rumsfeld famously phrased.

“The shock that occurred four years ago was kind of the most extreme version of an unknown, unknown that we have seen in many decades, if not ever,” Hatzius said, referring to Covid.

Empty office buildings

One risk that is casting a shadow over the economy is empty office buildings in the $20 trillion commercial real estate market — a problem caused in part by Covid and the rise of remote work.

Yet Hatzius, like Fed Chair Jerome Powell, doesn’t think empty office buildings will sink the US economy the way toxic mortgages did in 2008.

He pointed to the fact that office construction is a relatively small part of the economy and the fact that this problem is expected to play out over several years.

“It’s hard to see how that would cause a recession,” Hatzius said.