Goldman's Hatzius sees 'encouraging signs' that the economy could still achieve a soft landing

Published Tue, Sep 6 202212:35 PM EDT

The Federal Reserve's goal of achieving a "soft landing" for the U.S. economy amid soaring inflation and slowing growth remains a difficult but achievable task, according to Goldman Sachs' top economist. All the central bank needs to see is an economy growing below its potential for an extended period of time with a closer gap between labor supply and demand and a sizeable inflation decline. If all that sounds difficult, it's because it is. Jan Hatzius, Goldman's chief economist, acknowledged that "the path is narrow," though he said several factors point to it being doable. "While much can still go wrong and our probability that a (mild) recession will start in the next year remains about one in three, we see some encouraging signs that the economy is moving toward all three of these goals," Hatzius said Monday in a client note. His comments come with the U.S. dealing with a slowing economy that showed negative GDP growth in the first two quarters, compounded by inflation running near its highest levels in more than 40 years . Fed officials are raising interest rates to tame inflation but hope that the policy tightening won't be so severe that it sends the economy into a deep recession. Hatzius sees a number of factors working in the Fed's favor. Among them: A slow rebound in real income, a tightening of labor market conditions that will ease the upward pressure on wages and signs that the worst of the inflation hit is over. Those features in turn could allow the Fed to be less aggressive in its rate increases and give the economy some room to breathe even amid tighter fiscal and monetary policy. "The recent news on inflation has been particularly encouraging," Hatzius wrote. "Sharply lower commodity prices, a stronger dollar and large improvements in supply-chain disruptions all suggest that goods price inflation will continue to abate." Fed officials have said repeatedly they think they can control inflation without tanking the economy. They have never defined, however, what a "soft landing" could look like. Chairman Jerome Powell has made the term even more nebulous by adding "softish" to his universe of potential outcomes, and warned earlier this summer that conditions are in flux. "So anyone who is really sure that it's impossible or really sure that it will happen is probably underestimating the level of uncertainty," Powell said July 27 at his news conference following the last Federal Open Market Committee meeting. "And so I would certainly say it's an uncertain, uncertain thing. Nonetheless, it's our goal to achieve it, and we'll keep trying to do that." However, Powell also warned recently that there will be "some pain" involved on the way to a soft landing. The economy looks to be on course to avoid a third consecutive quarter of negative GDP growth. According to the Atlanta Fed's GDPNow rolling gauge of economic data, the third quarter is on track to grow 2.6%. Indicators of consumer spending have looked strong lately, and nonfarm payrolls rose 315,000 in August , the lowest monthly gain since April 2021 but still indicative of solid hiring growth. At the same time, the unemployment rate ticked higher to 3.7%, but for a reason the Fed likes to see, namely an increase in the labor force size that, if sustained, could compress that supply-demand imbalance that is driving wages higher. However, the employment picture remains mixed, with openings outnumbering available workers by nearly 2 to 1 in July. Job openings are up 4.2% from a year ago, though Hatzius noted they have declined on net over the past three months. At the same time, housing is mired in a deep slump amid rising mortgage rates that have led to the sharpest decline ever in affordability. So while Hatzius said the U.S. is likely to avoid a serious recession, he said growth will remain subdued. "All told, we remain comfortable with our forecast that U.S. growth will remain well below trend over the next year," he said.