Goldman Sachs Says U.S. Can Still Avoid a Recession

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  • Goldman Sachs puts the chances of a recession at just 35%.
  • Other economists are less optimistic, and many think there's a high chance the U.S. will struggle in 2023.
  • You can prepare for a recession by paying down high-interest debt and plumping up your emergency fund.

A 2023 recession is not a foregone conclusion.

A recent note from Goldman Sachs puts the chances of a recession at just 35%. According to Bloomberg, Goldman Sachs said that it could see a "very plausible" scenario in which the U.S. economy avoids recession. Its outlook is much more optimistic than that of many of the bank's counterparts.

JPMorgan's Jamie Dimon says people need to "be prepared for the worst." And Bloomberg economist models predicted a recession next year with 100% certainty. So what's behind the Goldman Sachs' analysis, and what does it mean for us?

Goldman Sachs thinks an economic soft landing is possible

Goldman Sachs's chief economist Jan Hatzius argues that a recession is still avoidable and thinks the Federal Reserve could still engineer a soft landing. A soft landing is where the Fed slows growth and gets inflation under control without allowing the economy to slide into recession. It's a very fine line to tread.

With inflation still running at 40-year highs, the Fed has been aggressively increasing interest rates to try to get prices under control. Unfortunately, there's a time lag between the Fed applying the economic brakes and any subsequent slowdown. As a result, it would be easy to overshoot and miss that much-vaunted soft landing sweet spot. If the Fed brakes too hard, it risks triggering a recession.

Economists use a host of different economic indicators to try to predict what will happen and understand what is happening now. These include things like GDP, inflation, industrial production level, and wages. One reason Goldman Sachs is swimming against the tide in saying a recession is avoidable is that it has a different slant on the data.

For example, when Goldman Sachs factored the collapse and recovery of the restaurant industry into its study of hourly earnings, it found they had in fact slowed. Hatzius also said that several other indicators, such as used car prices and leases on new rentals, suggest inflation is slowing.

It still makes sense to prepare for a recession

Economists are experts at juggling possibilities and tweaking models, which means there are all kinds of predictions out there. But the truth is that nobody knows what next year will bring. Hopefully, Goldman Sachs is correct and a recession is avoidable. But if the last few years have taught us anything, it's that it's worth being prepared.

There's no harm in taking steps to prepare for a recession -- even more so since many of the things you might do are useful in any economic climate. For example, sitting down and understanding what you spend versus what you earn is an important step in managing your money and building wealth. It is more important in an economic downturn because you may want to find ways to cut costs.

Having a well-stocked emergency fund will help if you face a medical emergency or other unexpected cost, whether it's recession related or otherwise. If you have three to six months' worth of living expenses tucked away in an accessible savings account, it cushions you against a number of financial crises. That money will mean you don't have to take on debt or sell your investments to tide you over if something goes wrong.

Similarly, paying down debt is a worthwhile goal in and of itself. If you're carrying high interest debt and we do hit difficult economic waters, it will make life more difficult. Not only will your debt payments weigh on your monthly costs, but the increases in interest rates mean that carrying debt will cost you more over time.

You might also look for other sources of income, especially if your emergency savings aren't quite where you want them to be. The job market is still relatively strong, meaning you might be able to pick up a side hustle. It can give you some extra cash now and potentially help if you do lose your job. Just make sure you don't neglect your main job. It's one thing to build a safety net; it's quite another if that very safety net damages your main source of income.

Bottom line

There isn't a lot many of us can do about whether the U.S. economy enters a recession next year. We can't stop Russia's ongoing aggression in Ukraine or influence whether the Fed continues to raise rates. But we can take steps to protect our finances and careers against the unknown. And we can make sure that a recession or any other financial crisis doesn't derail our finances.

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