The US economy is in the final stage of soft landing

After defying recession fears this year, Goldman Sachs Research expects the US economy to easily outperform consensus forecasts again in 2024.

U.S. gross domestic product is expected to expand 2.1% in 2024 on a full-year basis, compared to the 1% consensus forecast of economists polled by Bloomberg. Goldman Sachs Research is reaffirming its long-standing view that the chances of a US recession are much lower than commonly estimated – at just 15% over the next 12 months.

“Last year it was fair to ask whether the trend of labor market overheating could be reversed,” David Merkel, chief U.S. research economist at Goldman Sachs, wrote in the team’s report titled “The U.S. Economic Outlook for 2024: The Final Descent.” And the mentality of high inflation, which is worrying at times, is painless.” “But these problems now appear to have been largely resolved, the conditions for inflation to return to target are in place, and the harshest blows from monetary and fiscal tightening are already behind us,” Merkel writes.

How did the US inflation rate fall without unemployment rates rising?

At the beginning of 2023, Goldman Sachs Research claimed that the main risk was not a recession, as most forecasters had envisioned, but that the economy would accelerate again amid still-high inflation. In this case, the team assumed that the Fed would simply raise interest rates more aggressively to subdue demand growth so that supply could continue to catch up. But this did not happen. In the spring, banking pressures heightened concerns about raising interest rates too much, and by the summer it became clear that strong GDP growth was not preventing the labor market from continuing to rebalance or wage growth and inflation from continuing to decline, according to Goldman Sachs. research.

How was the United States able to achieve strong growth and progress in reducing inflation this year? Our economists point out that labor supply has recovered too much. The temporary effects on wages and prices have faded or reversed. High prices have worked for themselves, for example, by stimulating massive construction of rental housing.

What is somewhat more surprising is that labor demand has been contained even as final demand for goods and services accelerates and recession fears fade. The Beveridge curve, a way to show the relationship between unemployment and employment, may help explain why. “Very tight labor markets create a feedback loop between workers who quit and employers who proactively post more job openings,” Merkel wrote. This reaction “can heat up quickly, but it can also cool down quickly,” Merkel writes.

The tough part of the inflation battle appears to be over, according to Goldman Sachs research. The unemployment rate has barely changed, but other measures of labor market tightness have fallen sharply and are on average only slightly above pre-pandemic levels. This calming is probably good enough, or almost good enough, because inflation was somewhat low before the pandemic. This means that there is no longer a need for further growth below the potential level.

With inflation falling and the labor market recovering, Goldman Sachs Research expects that the Fed will keep interest rates steady until a rate cut in the fourth quarter of 2024. Our economists expect this policy decision to be followed by a 25 basis point cut per quarter . Until the federal funds rate reaches 3.5-3.75% (versus 5.25-5.5% now) in the second quarter of 2026.

Why is the US economy expected to beat consensus expectations?

The main reason the world’s largest economy accelerates from 2022 to 2023 is that the impact of fiscal tightening and central bank interest rate hikes on GDP growth has diminished sharply, according to Goldman Sachs research. In 2024, our economists expect a similarly modest drag on growth – a bit of a tightening of fiscal and fiscal conditions.

• Consumer spending is expected to be strong. Real disposable income is expected to grow by about 3% next year amid slowing but strong job gains, real wage growth of about 1%, and a significant increase in household interest income. Income growth will be partly offset by a higher savings rate, which is very low compared to the pre-pandemic level.

• Business investment will slow down. Subsidies driven by the CHIPS Act and the Inflation Reduction Act accounted for all of the net growth in business investment this year, and financing conditions are expected to be more difficult, especially for commercial real estate. At the same time, investment in artificial intelligence is rising and recession fears are fading, which may make business leaders more confident. Overall, business investment is expected to grow by 1.75% in 2024.

• Existing home sales are expected to be very weak next year as mortgage rates remain high. Residential investment is expected to end the year roughly flat. Declining affordability combined with tight supply should lead to modest home price growth of around 1% in 2024.

• Federal government spending is expected to remain roughly flat, while state and local spending will increase by 0.5%. A government shutdown would shift growth between quarters.

• US imports have fallen from a high level (due to the pandemic stimulus), but US exports have remained low. Goldman Sachs Research expects that a recovery in foreign economic growth next year will boost demand for American exports. This is expected to narrow the trade deficit enough in 2024 to contribute 0.2 percentage points to GDP expansion.

With GDP growth approaching the economy’s potential growth rate, labor market conditions are expected to be roughly stable in 2024. Our economists estimate the pace of the current trend in job growth at about 175,000 jobs per month, and expect it to slow to 100,000 next year. Second half of 2024. The unemployment rate will likely hover in the mid- to high-mid range next year because the rate of layoffs remains low and job openings remain higher than in 2019 – one of the best job markets in US history – in all Almost a year. industry.

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