Is the US economy still in recession? Wall Street is in an uproar.

With the aggressive rate hikes by the Federal Reserve, whether the US economy can avoid a recession has been a mystery in the market this year.

A series of recent US economic data has shown resilience, causing many Wall Street investment banks to change their views since the end of last year, almost no longer believing that the US economy will fall into a recession.

Bank of America, JPMorgan Chase, and Goldman Sachs have all lowered their probability forecasts of a US economic recession. Goldman Sachs has recently lowered its recession probability to only 15%, further below its July forecast of 20%. The reason is that cooling inflation and a resilient labor market indicate that the Federal Reserve may not need to raise interest rates further.

At the same time, despite the increased bets by Wall Street investment banks on the Federal Reserve guiding the US economy to a soft landing, there are still economists and strategists who insist on their recession predictions.

Goldman Sachs' Hatzius: Federal Reserve may not need to raise interest rates further, US economic recession probability is only 15%

Jan Hatzius, Chief Economist at Goldman Sachs, stated in a recent research report:

"First, against the backdrop of continued robust job growth and rising real wages, real disposable income appears poised to reaccelerate in 2024. Second, we remain strongly opposed to the view that the ‘long and variable lags’ of monetary policy will push the economy into recession."

He believes that the economic headwinds caused by tightening policies will continue to diminish and "will disappear completely by early 2024."

Hatzius is more optimistic about US economic growth than his Wall Street peers, with a Bloomberg survey showing a recession probability of 60%. He expects the average growth rate of the US economy to be 2% by the end of 2024.

Hatzius also pointed out that a rate hike in September by the Federal Reserve is "off the table," and there are significant obstacles to a rate hike in November.

He believes that the Federal Reserve may not need to raise interest rates further, but it is also unlikely to immediately shift to a more accommodative stance unless growth slows more than expected:

"Overall, our confidence that the Fed is done hiking has increased over the past month, and rising unemployment, slowing wage growth, and falling core prices should help keep Fed officials on hold."

"Nevertheless, unless growth slows more than we currently expect over the next few quarters, Fed officials are unlikely to shift quickly to a more accommodative policy. We expect the Fed to very gradually cut rates by 25 basis points per quarter starting in the second quarter of 2024."

Fidelity's Ahmed: US economy has a 60% probability of falling into a recession due to continuous rate hikes by the Federal Reserve

Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, stated in a recent interview that although the US economy may appear strong, it is still possible to fall into a recession due to the continuous rate hikes by the Federal Reserve. He stated that when corporate bonds mature in the next few years, the economy may decline because companies that were able to obtain cheap funding in the past must now pay higher interest rates when refinancing.

He said:

"This cycle will eventually lead to a recession because the transmission of interest rates will start to take effect. If the Federal Reserve does not abandon its tightening stance at some point, everyone will have to pay higher real interest rates."

Data from Fidelity shows that about a quarter of investment-grade bonds in the United States will mature between 2023 and 2025. In other words, before this round of interest rate hikes, companies borrowed funds at relatively low costs. However, when these bonds mature, they may face higher refinancing costs in the current high-interest-rate environment.

An increase in borrowing costs means that companies may reduce investment. In addition, consumer spending usually declines when interest rates rise. This situation will slow down the pace of economic growth and may lead to a recession.

Although the recovery of US consumers and the labor market has surprisingly forced Ahmed to postpone his prediction of an upcoming economic recession to next year and reduce his team's forecast of the probability of an economic recession from 80% to 60%, an economic recession is still Ahmed's fundamental prediction.

He said, "Currently, various sectors have not fully felt the pressure of high interest rates because they still rely on rates locked in during the previous low-interest-rate period."

Ahmed's views are supported by a recent study by Federal Reserve officials, which found that historically, regardless of whether there will be future interest rate hikes, it takes about a year for companies to fully feel the impact of the interest rate hikes that have already occurred.

David Rosenberg, the Big Short: The US will enter a recession within six months unless a miracle happens

David Rosenberg, a well-known economist and former Chief North American Economist at Merrill Lynch, believes that the impact of the Federal Reserve's interest rate hike cycle has not yet fully manifested, and the US economy will quickly head towards a recession.

In an interview last Thursday, Rosenberg, the President of Rosenberg Research, discussed the bleak economic prospects in the United States, Federal Reserve policies, credit card debt issues, and the comparison between the current situation and 2008.

According to Rosenberg, the Federal Reserve's 11 interest rate hikes are one of the most aggressive tightening cycles in history, which is not a good sign for the next few months.

Rosenberg said:

"If I remember correctly, we have experienced the largest interest rate shock since 1981. Subsequently, a recession followed in 1982, and by the way, this was not a mild recession. Some of the impact was weakened by the continued effects of fiscal stimulus plans, which have now expired."

He said:

"I will remain open to both a hard landing and a soft landing scenario. If we are still discussing an economic recession by the first quarter of next year, I will admit that I was wrong. I am willing to wait another six months. If my prediction has not been proven right by then, I will be that screaming uncle." "Most recessions since World War II have been caused by interest rate shocks, not fiscal shocks. Out of the past 14 tightening cycles, 11 have resulted in economic downturns. This is not a coincidence. In the mid-1960s, mid-1980s, and mid-1990s, the Federal Reserve did not raise rates to the level that would invert the yield curve. However, this time around, the Fed has largely ignored the inverted curve or viewed it as a necessary cost to contain inflation and safeguard credibility."

When discussing the issue of U.S. credit card debt, he stated:

"We have simply replaced subprime mortgages from 15 years ago with credit card debt. That's how recessions start, with the credit quality of a specific asset class being severely eroded. Now what you're seeing is credit cards, although it's not housing mortgages like in 2008, it's not insignificant either."

Rosenberg said:

"I believe that if we can escape this minor recession, it would be a miracle."

He also mentioned:

"Those who are calling for an economic recession need to have a little more patience. What's masking this situation is all the fiscal stimulus measures, but fiscal stimulus has an expiration date, which actually starts this month and next month. I'm not changing my view, I know others have thrown in the towel. They did the same thing in 2007. And the recession didn't arrive until December 2007, but the National Bureau of Economic Research (NBER) didn't even declare it until 12 months later."