Goldman cuts GDP outlook and raises its concern over a recession

Published Fri, Mar 11 202212:28 PM EST

U.S. economic growth is looking lower than expected in 2022 and the risks for recession in the next year are rising, according to Goldman Sachs. The Wall Street firm's economists cut their outlook for gross domestic product for the full year to 2.9%, down from 3.1% in the most recent revision, and to just 1.75% as measured from the fourth quarter of 2021 to the final three-month period of 2022. While the most recent full-year downgrade is only a relative nudge lower, it represents another cut to an outlook that had been as high as 4.2% at one point. Primary among the reasons for the diminished view is the added pressure from the Russia-Ukraine war and its impact on U.S. inflation that is running at the highest level since January 1982. "The largest risk to the US economy from the war in Ukraine remains higher commodity prices," Goldman economist Joseph Briggs said in a note to clients. "Rising commodity prices will likely result in a drag on consumer spending, as households — and lower-income households in particular — are forced to spend a larger share of income on food and gas." The consumer price index for February showed inflation running at 7.9% from 12-months ago, fueled by a broad array of pressures both from food and energy but also by housing costs and airline prices. That trend has put a dent in consumer sentiment. A widely followed gauge from the University of Michigan, released Friday, showed that consumer future expectations for the economy slumped to their lowest level since October 2011 while the inflation outlook was its highest since November 1981. Those pressures are expected to feed through to a $23 trillion U.S. economy that derives more than 68% of its growth from consumer spending. The recession factors While the probability that the U.S. enters recession remains low, Goldman said the chances are rising, particularly if oil price increases escalate . "Even after these downgrades, we still see risks around our growth forecast as skewed to the downside, particularly if sanctions escalate or if oil prices rise even further," Briggs wrote. "Following our downgrade, we now see a somewhat higher risk that the US enters a recession over the next year, especially since we now expect below trend growth in both 2022Q1 and 2022Q2." Economists watch the spread, or curve, between various bond yields for clues about economic slowing. Inverted curves, or when longer-duration yields fall below shorter-term yields, reflect dimming outlooks for longer-term economic growth and have been reliable recession indicators. The New York Federal Reserve watches the relationship between the 10-year Treasury note and the three-month bill. That curve last inverted in February 2020, shortly before the Covid-induced recession. The New York Fed said the current spread, at 1.59 percentage points, equates to just a 6% chance of recession in the next 12 months. However, other relationships Goldman follows point to a higher probability. "While our baseline forecast assumes that further service sector reopening and spending from excess savings will keep real GDP growth positive in the coming quarters, uncertainty around the outlook is higher than normal, and we view the risks of a recession as broadly in line with the 20-35% odds currently implied by models based on the slope of the yield curve," Briggs wrote. Goldman is not alone in its concern about the future growth path. Wells Fargo also took down its growth estimates, for similar reasons but by an even larger amount. The bank slashed its full-year GDP target to 3.1% from 4.5% while boosting its inflation outlook to 6.8% from 5.3%. However, the economists cut their inflation forecast to 3.4% from 3.6%, and it's the employment picture that Wells Fargo thinks will keep the U.S. out of recession. "The reason for the economic growth downgrade is mainly the prospect for more pervasive and persistent inflation, which we anticipate will slow the U.S. economy later in the year," the firm said in a note. "While recession risks have assuredly risen, we still expect 2022 economic growth at historically average levels – and no recession in the U.S." Treasury Secretary Janet Yellen told CNBC on Thursday that she sees the U.S. economy staying out of recession but beset by inflation for the next year. The White House view, which is that the pandemic-specific factors that have fueled inflation will recede by the end of 2022. The Biden administration has cited the Russian invasion as aggravating factors for inflation and has proposed several measures to ease price pressures.

A man fills up at a gas station in Bethesda, Maryland on February 23, 2022.

Mandel Ngan | AFP | Getty Images

U.S. economic growth is looking lower than expected in 2022 and the risks for recession in the next year are rising, according to Goldman Sachs.