“The classic risks of financial imbalances and asset bubbles could re-emerge, and both the growing financialization of the US economy and the increased global transmission of financial shocks … could present new risks,” Hatzius wrote. “But risk from financial imbalances seems to be in abeyance at present, partly because of crisis-induced caution on the part of households, firms, and regulators.”
“More importantly,” he added, “the private sector remains in very good financial shape and looks much less vulnerable to a decline in asset prices or a tightening in lending standards than in the last couple of cycles.”
Investors, though, seem more worried about exogenous shocks — the U.S.-China trade impasse exploding, combined with messy geopolitical events like Brexit and weakening corporate earnings that suggest the 2017 tax cut boost may be waning.
Goldman, though, looked through the last century of recession history and found that they primarily fell into the aforementioned causes.
Addressing them individually, the economists found that industrial imbalances and inventory shocks are less prevalent now that companies have gotten better at calibrating inventories; oil shocks are less of a danger now that the U.S. has become more energy independent; fiscal tightening generally has happened only around “major postwar demoblizations” that haven’t occurred since the Korean War ended, and financial risk, while the cause of the Great Recession, are not prevalent today with the safeguards built into the banking system.
Hatzius notes that forecasts are getting more ominous, with economist outlooks pointing to a 25 percent chance of a pullback and market-priced risks around 50 percent.
“While new risks could emerge, none of the main sources of recent recessions … seem too concerning for now,” he said. “As a result, the prospects for a soft landing look better than widely thought.”