3 Reasons Why Goldman Sachs Thinks U.S. Can Escape a Recession

Goldman Sachs analysts still think a recession is avoidable.

Goldman Sachs remains optimistic that the U.S. can avoid a recession next year. In a recent investor conference, analysts doubled down on their belief that a recession is not inevitable. According to Insider, senior global economist at Goldman Sachs, Daan Struyven, said, "Our baseline is that the US economy narrowly escapes a recession in 2023."

This comes in spite of warnings from a number of other top investment banks and business leaders. Here are three main reasons why.

1. Unemployment is still relatively low

There's a close correlation between jobs, wages, inflation, and recession predictions. The Federal Reserve has been aggressively raising interest rates in an effort to slow the economy and get inflation under control. Unfortunately, some economists believe this will result in higher unemployment and, ultimately, a recession. Goldman Sachs points out this hasn't happened yet.

Part of the connection between jobs and inflation is that when unemployment is low and there are a lot of job openings, employers offer higher wages in order to fill vacant positions. Higher wages means more costs for businesses, which ultimately translates to higher costs for consumers. This contributes to more inflation. It can then mean employees demand higher wages as they try to keep up with higher living costs, creating an unhelpful cycle.

In an ideal world, the Fed wants to see a reduction in the number of job openings without a substantial increase in unemployment. The idea is to raise inflation enough to put the brakes on the economy and curb growth, without braking so hard that companies are forced to lay people off. Goldman Sachs argues that this could be possible, pointing to a slight decrease in the number of job openings in October and continued low unemployment.

2. Inflation is slowing

Many Americans' bank balances have suffered because of dramatic price increases this year. Some have been forced to dip into savings and others have taken on debt in order to cover their living costs. The good news is that Goldman Sachs predicts that inflation will decrease next year.

In fact, it forecasts that the prices of goods will actually fall in late 2023 -- a far cry from price hikes of 7% or more that we've seen in 2022. Goldman thinks that improvements in the supply chain, slower wage growth, and falling housing costs will all cause core inflation to drop significantly.

3. GDP grew in the third quarter

The U.S. GDP (gross domestic product) grew 2.9% in the third quarter of this year, according to the Bureau of Economic Analysis. This was stronger than expected and some economists believe it points to the resilience of the economy. The fact that the economy is still growing after some of the most dramatic rate hikes the U.S. has ever seen suggests that a recession is not a slam dunk. According to Insider, Goldman Sachs believes there are strong reasons to project continued growth in 2023 and 2024.

Why economic predictions vary so wildly

Economists use a whole range of different indicators to try to predict what might happen next. It's all about interpreting the information and playing the percentages to make a best guess at how things might play out. Each economist or model does that differently. One might give more weight to, say, jobless data than another. And one might filter out certain parts of that data and reach different conclusions from the same information.

Given that a recession would likely involve job losses and more pain for American households, it would be great if Goldman Sachs is correct. However, it's also worth preparing for one, just in case. If you don't have an emergency fund that will cover three to six months' of living expenses, try to put some money aside. That way if you do lose your job or face another unexpected financial emergency, you'll be better able to cover your bills.

If you carry a credit card balance, do what you can to pay it down. The double whammy of higher interest rates and an economic downturn could make it more difficult -- and more expensive -- to pay off debt next year. It probably isn't realistic to think you can become debt-free, but the more you can pay down the better.

Bottom line

It may feel as if we've been hearing recession warnings for most of this year. And the spiraling cost of living has certainly made it harder to insulate your finances against economic difficulties. But the more you can do now, the better positioned you'll be to weather any upcoming economic storms.