The odds of the US facing an economic recession in the next two years have hit 35 per cent according to top Goldman Sachs analysts.
The Federal Reserve will be hard pressed to tighten monetary policy and curb inflation without causing the US economy to contract a Goldman Sachs research report has revealed.
The US government faces the challenge of closing the gap between the number of workers and available jobs by cutting vacancies while keeping wage growth below the Fed’s target for inflation. A large decline in the gap between workers and available jobs has typically coincided with a US recession, analysts said.
“Taken at face value, these historical patterns suggest the Fed faces a hard path to a soft landing as it aims to narrow the jobs-workers gap and bring inflation back towards its two per cent target,” said Goldman Sachs’ chief economist Jan Hatzius.
Historically, eleven out of fourteen economic tightening cycles pursued in the US since World War 2 have resulted in a recession within two years. However, so-called “soft” or “softish” landings have become increasingly common.
In G10 countries 58 per cent of tightening cycles avoided a recession for one year after the last hike and 44 per cent avoided an economic contraction for two years.
“We still do not see a recession as inevitable,” Hatzius continued. “Nevertheless the historical G10 evidence suggests the odds of a recession are higher than normal.”
According to Goldman Sachs the odds of the US facing an economic recession in the next twelve months stands at 15 per cent. Post-Covid-19 normalisations in labor supply and durable goods prices will help the Fed avoid this outcome.
The analysis comes as the US faces runaway inflation with the PCE price index reaching a 40-year-high of 5.4 per cent in February while CPI inflation rose to 6.2 per cent. The Fed is planning to slow wage growth – currently running at between five and six per cent – with further interest rate hikes this year.