Goldman Sachs Cuts U.S. Growth Forecast, Says Recession Odds as High as 35%

It’s a pretty straightforward call. “Combining our commodity strategists’ forecasts with estimates of pass-through to consumer prices, we estimate that rising gas and food prices will create an effective 0.7 percent point drag on real disposable personal income in 2022 with larger drags for lower-income households whose spending is typically more sensitive to fluctuations in income,” said the note written by Joseph Briggs. “Although households will likely partially offset this income drag by reducing savings, this hit to income should weigh on spending in 2022.”

Besides commodity prices, the Goldman team also noted that consumer sentiment tends to be affected by geopolitical crises, and already gauges from Morning Consult and Ipsos have dropped. The downgrade to Europe’s growth prospects will hit U.S. exports, and a tightening of financial conditions will also weigh on U.S. growth.

The Goldman team said, if anything, they may be too positive on the outlook for the U.S. economy. “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, for example, to the $175/barrel price target our commodity strategists see as possible if supply losses reach four million barrels a day. Additionally, we have not assumed any growth hit due to metal shortages since—aside from palladium—only a small share of U.S. commodity demand is met by Russian exports,” said Briggs.

Recession risks, they said, are mounting. While they expect further service-sector reopening and spending from excess savings to keep the U.S. economy growing, they said the chances of a recession next year are between 20% and 35%, or roughly as implied by the slope of the U.S. Treasury yield curve.

The chart

It wasn’t that long ago when European stocks were the trendy call for 2022, on the logic that the region would benefit from the NextGenerationEU spending and a later recovery from COVID-19 than the U.S. Investors aren’t sharing that view now, with the largest-ever retreat from European equities on record.

The buzz

Attention is back on Russia and Ukraine heading into the weekend. Russian President Vladimir Putin was quoted as saying there were “certain positive shifts” from Ukraine, news that sent stock futures higher. Russia on Friday struck military bases in western Ukraine and claimed to have 16,000 volunteer fighters from the Middle East.

U.S. and European allies were set to revoke “most favored nation” trading status for Russia, as Russia announced an export ban on more than 200 products, ranging from medical equipment to locomotives.

China ordered a COVID-19 lockdown of the nine million residents of the northeastern city of Changchun.

DocuSign
DOCU,
-20.10%
shares skidded 17% in after-hours action, after the online signature company issued guidance on bookings and revenue below Wall Street estimates.

Rivian Automotive
RIVN,
-7.56%
slumped as the electric-truck maker cut production guidance.

Educational publisher Pearson
PSO,
+17.72%
surged in London trade after Apollo Global Management said it may make an offer for the company.

The University of Michigan’s consumer sentiment index is due for release at 10 a.m. Eastern.

The markets

U.S. stock futures
ES00,
+0.10%

NQ00,
+0.10%
surged following the Putin remarks. The yield on the 10-year Treasury
TMUBMUSD10Y,
1.997%
reclaimed the 2% mark, and oil
CL.1,
-0.22%
futures traded lower.

Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.

Random reads

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