As the cries of an impending recession sound louder and louder, investors swept the economic landscape for any sign of the exact date of the next crisis.
Whether it's looking at the yield curve, knowing consumer confidence or other indicators of the economic climate, there's no denying that's what people think. And it scares them.
Fortunately for those who felt uncertain, Goldman Sachs has been looking into the matter. The company began by looking at the five major recessionary factors in its history: (1) industrial shocks, (2) oil shocks, (3) inflationary overheating that leads to aggressive rate hikes, (4) financial imbalances and (5) fiscal tightening.
Goldman says that none of these five red flags is particularly troubling at the moment. So what does this mean for the current situation?
In order to answer this question, Goldman has considered something new: a possible catalyst for a recession that has never been the subject of an economic recession. They envision the possibility that the slowdown in global growth will spread to the United States.
If this seems to you exaggerated, it is because, until recently, it was the case. But as the graph below shows, this has become a very real and valid concern for people.
"The tightening of economic and financial ties has probably increased the risk of foreign spillovers," wrote Goldman economists, led by Jan Hatzius, in a recent note to a client.
To determine what an overflow might look like, Goldman performed a handful of scenarios. The firm looked at how global, 1, 2, 3, and 4 percentage point declines in US growth would occur on the US front. And their conclusions were discordant.
If a 4 percentage-point slowdown occurred – which is arguably the worst-case scenario – the 2% US growth expected this year would be reduced to zero, which would only trigger a recession.
"The bar is quite high, although it is below the historical average, both because the share of exports in US production has increased and the potential growth rate of the US economy has increased. decreased, thus facilitating the release of at least one technical recession.according to the standard if the arbitrary definition of the recession as negative growth, "said Hatzius.
This dynamic is described in the table below.
Goldman also examined the significance of these downturn scenarios in terms of the probabilities of recession. The firm found that if the feared result of 4 percentage points materializes, the odds would be 64%. This is not a situation that any American investor wants.
In the end, Goldman's findings suggest that the United States is at greater risk that the recession will be triggered by a foreign slowdown than in the past. As such, if the specific developments described above occur, the United States could experience an unprecedented crisis.
For these reasons, it would be prudent for investors focused on the United States to keep an eye on events abroad, lest they encroach on the national economy.