What’s ahead for the U.S. economy?

Episode Summary

Executive Summary: Goldman Sachs chief U.S. economist David Mericle argues the U.S. economy remains on track for a soft landing, with recession risk lower than consensus thanks to an unusually smooth labor-market rebalancing, easing inflation pressures, and only moderate credit tightening from banking stress. He expects inflation to decline gradually, though not return to 2% until 2025.

Main Topics: Soft-landing outlook and recession risk (Priority: 5/5): Mericle says Goldman remains more optimistic than consensus on avoiding recession, citing improved labor-market balance and a lower probability of recession over the next 12 months. Labor-market rebalancing without rising unemployment (Priority: 5/5): The labor market has moved from overheated to more balanced primarily through falling job openings and rising labor supply, not through mass layoffs or a higher unemployment rate. Inflation outlook and why it is still sticky (Priority: 5/5): Despite disappointing core inflation prints, Mericle sees several reasons inflation should keep falling, including shelter lag, softer wage growth, repaired supply chains, and normalizing expectations. Fed pause and policy path (Priority: 4/5): The June Fed pause is interpreted as acknowledgment that core inflation has not fallen enough yet; Mericle notes the Fed signaled more hikes, but the eventual policy path depends on incoming data. Consumer resilience and income growth (Priority: 4/5): Household spending remains supported by positive real disposable income growth, strong job gains, higher interest income, and other technical boosts, reducing near-term recession risk. Banking stress and credit tightening (Priority: 4/5): Bank stress is expected to tighten credit moderately and shave growth, but Mericle does not view it as a recessionary shock because the financial system is more diversified and lending conditions were already tightening. Key downside risks to the soft landing (Priority: 4/5): Risks include a worse-than-expected banking effect, a shift from job-openings declines to larger layoffs, and stickier non-shelter services inflation.

Key Arguments: The labor market has rebalanced in a historically unusual, relatively painless way: job openings have fallen sharply while unemployment has not risen. Goldman lowered its 12-month recession probability to 25% because labor-market rebalancing has progressed enough to make a soft landing more plausible. Banking stress matters, but the impact is likely moderate rather than recessionary because lending alternatives exist and big banks are not uniformly constrained. Core inflation has disappointed recently, but leading indicators suggest shelter inflation, wages, and supply-chain normalization should pull it lower over time. Headline inflation is easier to bring down than core inflation because prior commodity spikes and energy shocks have rolled out of the comparison base. Consumer demand is supported by rising real disposable income, so spending can remain solid even as inflation moderates. The main remaining uncertainty is whether further cooling in labor demand will continue to come through reduced openings rather than rising layoffs. Inflation should trend down gradually, but returning to the Fed’s 2% target will take time because many services prices reset with lags.

Data Points: 12-month recession probability: 25% - Goldman Sachs Research’s updated recession outlook Consensus recession probability: over 60% - What other forecasters still expect for recession risk Jobs-workers gap: declined from about 6 million to about 3 million - Measure of labor demand minus labor supply Labor market characterization at Fed hiking cycle start: most overheated labor market in U.S. history - Mericle’s description of initial conditions Core CPI contribution from shelter: 2 to 2.5 percentage points lower eventually - Expected disinflation from shelter over time Core PCE inflation forecast for end-2023: high threes - Goldman’s expected year-end level Core PCE inflation forecast for end-2024: low to mid twos - Goldman’s expected end-next-year level Core PCE inflation target timing: 2025 - Mericle says not realistically back to 2% until then Estimated GDP impact from banking stress: about 0.4 percentage points - Baseline estimate for growth drag Fed June meeting expected hikes: 2 rather than 1 additional rate hikes this year - Surprise in the FOMC’s June projection Consumer income growth expectation: 3% to 4% - Mericle’s prior expectation for real income growth Current labor-market signals: initial claims, continuing claims, and layoff rates up - Indicators suggesting normalization or possible risk

Pivotal Quotes: "We recently lowered our 12-month recession probability to 25% because we felt like we've seen enough in terms of the labor market rebalancing to feel more optimistic that that can be accomplished without a recession." — David Mericle: Goldman’s overall soft-landing view "We've seen a historically unprecedented decline in job openings without seeing any increase at all in the unemployment rate." — David Mericle: Evidence supporting the labor-market rebalancing argument "I actually feel that the inflation outlook has brightened." — David Mericle: Why he remains constructive despite recent core inflation disappointment

Implications: Listeners should expect slower but still positive growth, easing inflation, and no immediate recession in the base case. The key watchpoints are credit conditions, jobless claims, and services inflation, which will determine whether the soft landing holds.