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Next setback: Goldman Sachs says it may be different in history



As screams of a threatening recession ring higher, investors have blamed the economic landscape for some signs when the very next breakdown will happen.

If it means seeing the yield curve, reading consumer confidence or other different economic emotional indicators, it is not denied it is on people's minds. And it has them scared.

Fortunately for those who feel insecure, Goldman Sachs has looked at the matter. The firm began by looking at what it was found to be the five primary driving forces behind setbacks throughout history: (1) industrial shocks, (2) oil shots, (3) inflationary overheating leading to aggressive interest rate increases, (4) economic imbalances, and (5) fiscal tightening.

Here's where the twist comes: Goldman says that none of these five red flags are particularly worrying at the moment. So what does that mean for the current situation?

To answer that question, Goldman has considered something novel ̵

1; a possible low-energy catalyst that has no historical record to cause economic downturn. They are looking at the possibility of slowing global growth into the US.

If it sounds far behind you, it is because – recently – it was. But as the chart below shows, it has become a very real and valid concern for people.

Goldman Sachs

"Stronger economic and financial contexts today have probably increased the risk from foreign gaming surpluses," Goldman economists led by Jan Hatzius wrote in a recent client note.

To find out what a possible spillover can look like, Goldman ran a number of scenarios. The company looked at how previous worldwide growth cuts of 1, 2, 3 and 4 percentage points would manifest on the US front. And their findings were offensive.

If a 4 percentage point slowdown occurs – that is certainly the worst scenario – the 2% US growth this year is expected to shrink to zero, all of which will include a recession.

"This is quite high, although it is lower than it has been historically, both because the share of exports in US production has increased and because the US economy's potential growth rate has fallen, making it easier to reach at least one technical recession below the standard if an arbitrary definition of recession as negative growth, says Hatzius.

This dynamic is outlined in the table below.

Goldman Sachs

Goldman also looked at what These downturn scenarios would mean recession probabilities, and the company found that if the dreaded 4 percentage point is out, it would increase the odds to a lot of 64%, which is unlikely a US investor wants.

Finally, Goldmans suggests The US is more likely to have a recession kicked off by a slowdown than ever in history, as if the specific developments are sketchy Rt above, the United States may be in for an unprecedented breakdown of varieties.

For these reasons, it will be cautious for US focused investors to keep an eye on foreign events so they do not face the domestic economy.


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