Executives at Wall Street’s largest banks — Goldman Sachs, JPMorgan Chase and Bank of America — have shared “cautious” outlooks on the economy in 2023.
Goldman CEO David Solomon said his clients were apprehensive about the economic situation in the future. According to Solomon, many company leaders are tracking financial data to get insights. He added that Goldman’s corporate clients had been revising their revenue forecasts lower, albeit not dramatically.
“We’ve seen clients shift attention away from supply chain resiliency and toward keeping headcount down,” Solomon said.
Solomon also discussed the possible recession in the U.S. He said economists at Goldman were more optimistic than him about the country's ability to avoid a recession. Solomon predicted a 66.67 percent probability for the nation to enter a recession next year.
JPMorgan executive Marianne Lake said that although the economy remained resilient under the pressures of inflation and rate hikes, her bank had a high expectation that “a modest recession” would hit soon.
Meanwhile, Bank of America chief Brian Moynihan discussed consumer savings in the U.S., which peaked last April due to tax refunds. Moynihan said on average, post-pandemic saving rates were higher than the pre-pandemic.
He predicted that it would remain that way if unemployment stayed low. If the unemployment rate goes higher in the future, Americans will use their savings to survive until they can secure employment.
Last week, Federal Reserve chairman Jerome Powell implied that the central bank would scale back on the rate hike during the next FOMC meeting. However, recent economic data, such as job reports and non-manufacturing PMI, have revealed that inflation risks are still prevalent in the economy.
Global geopolitical tensions, such as the U.S.-China declining relationship and the war in Ukraine, also added to the bleak outlook. The crises have caused supply issues for industries in various parts of the globe in the past months. Solomon, however, assured that investors did not “panic.”
“Balance sheets are strong. Even with higher interest rates, investment grade markets remain open,” Solomon said.
Although the capital market activity did not show an expected rebound this quarter, JPMorgan CEO Jamie Dimon assured that the U.S. banking system could cope with any pressure.
Fed’s interest rate hike
Goldman is adamant that the federal funds rate will peak at 5.0 to 5.25 percent in mid-2023. Earlier, the firm forecasted that the rate would peak at 4.25 to 4.5 percent.
Solomon explained that the market had assumed the Fed would stop its rate hikes soon. However, Goldman is firm that the U.S. economy is “still early” in a tightening cycle. The company expects the central bank not to start cutting benchmark rates in 2023.
Long-time investor Jim Cramer proposed several reasons why the central bank would not stop its rate hike anytime soon. Cramer argued that there were not enough people joining the workforce, leading to increased wages.
He added that there was a disproportion in the workforce, meaning that there would be significant layoffs in certain sectors, including data analysis and customer management. Additionally, too many companies were established in the past two years, contributing to wage inflation.
Another job market issue that the U.S. is currently experiencing is the mismatch between job openings and job seekers. Crammer specifically pointed out the lack of engineers in the job market.