The US economic expansion is likely only in its middle phase, with the chances of a recession in the next three years at a “below average” possibility, according to bank Goldman Sachs.
Even if the current run is just 10 months away from being the longest expansion on record, Goldman Sachs economist Daan Struyven used a model to check current conditions and found there are few signs of overheating.
“The good news is that the model still classifies the expansion as mid-cycle,” Struyven said in a note. “It sees the pickup in wage and price pressure as still too muted for an inflation overshoot late-cycle and screens the private sector saving surplus – which now stands above the historical average – as too large for a financial overshoot later-cycle.”
An “inflation overshoot” primarily would entail highly elevated asset prices – like the stock market – as well as extremes with wage growth and price spikes. Meanwhile, a financial overshoot would mean high private sector deficits and extremes in consumer confidence.
Inflation has been edging higher like salary increases. Consumer confidence also is near record levels. On the other hand, Struyven considers the moves as controlled and he claims that they are unlikely to cause a strain in the economy.
“Cyclically, the financial system and the economy have spent a long time climbing out of the deep hole torn by the crisis and Great Recession,” he said. “ And structurally, better anchored inflation expectations allow the Fed to increase interest rates at a more gradual pace than in past cycles.”
The economy has been on a strong run in 2018, with 2.2 percent GDP growth in first quarter followed by 4.2 percent in the second. The Atlanta Fed is tracking third quarter gains at 4.1 percent, though it was ahead of most Wall Street forecasts.
Many Wall Street participants believe that the length of the economic rebound after the financial crisis and accompanying Great Recession, on top of an unemployment rate at 3.9 percent and just off a 59-year low, make for a recovery that can’t last much longer. To add to that, the Federal Reserve has been increasing interest rates gradually, fuelling belief that the current strong speed in particular is compromised.
Struyven said that there’s danger that the current conditions could overheat and at least send the recovery from mid-cycle to late-cycle.
“The less good news is that further strong growth could push us to a late-cycle setting relatively soon,” he said. “The labor market is already there, and it would not take much additional wage and price acceleration for the model to indicate an inflation overshoot late-cycle. A financial overshoot late-cycle diagnosis is slightly further off, despite the telltale high levels of confidence.”
On the other hand, he said that even if that’s true, recession risk is “muted in the near term and below average at a three-year horizon.”
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