Despite recent numbers in the US, R word is unwarranted: Goldman Sachs

Despite US GDP (Gross domestic product) having reportedly tanked for a second consecutive quarter, Goldman Sachs looks to the booming job market to argue that the US economy is by no means experiencing the R word.

Given that the economy is currently undergoing the necessary slowdown to bring supply and demand into balance, David Mericle, chief US economist at Goldman Sachs Research takes the contrarian view that the US economy has not dipped into recession.

“Thanks to the fiscal and monetary policy tightening that has already been delivered or signalled this year, it appears that we're now on the desired trajectory,” notes Mericle.

He reminds investors the National Bureau of Economic Research uses wider criteria to make the official call on recession.

“My take is that the economy has undergone a needed deceleration to a pace of growth that is below its long-term potential growth rate.”

What does Goldman’s expect?

While Goldman’s admits there’s an elevated recession risk over the next two years, the broker suspects there’s sufficient heavy lifting being undertaken to prevent this eventuality.

The broker expects The Fed to slow the pace of rate hikes to 50 basis points (bps) in September and 25 bps in November and December, eventually topping out at a rate of 3.25% to 3.5%.

Rebalancing

Recent rate movements by The Fed, adds Mericle has tempered growth in GDP enough to start rebalancing the labour market and supply and demand within the economy.

However, he notes there still hasn't been “convincing progress” on containing wage growth and inflation.

What also remains unclear, adds Mericle is whether recent activity will be sufficient to curb increases in consumer prices back to The Fed’s 2% goal on a reasonable time frame.

“Fed officials are still committed to trying to solve the inflation problem in a gentle way through a gradual rebalancing of supply and demand,” Mericle pointed out.

“… they [The Fed] seem to agree with our assessment that we’re now on a low enough growth trajectory that it makes sense to start preparing to slow the pace of rate hikes to avoid inadvertently overdoing it.”

Key metrics Goldman Sachs is watching closely as the economy rebalances.

Overall, the broker is closely monitoring how The Fed plans to:

• Keep economic growth below its long-run potential rate in order to…

• Rebalance supply and demand in the labour market and…

• Bring down wage growth and inflation.

“We’re monitoring measures that tell us how we’re doing on those three goals,” adds Mericle.

“… the employment and job openings data suggest we’re off to a very good start… but have further to go; and the wage growth and inflation data suggest we haven’t made convincing progress yet.”