Goldman Sachs now sees a 38% chance of a U.S. recession

April 5, 2022, 10:00 AM UTC

Buongiorno, tutti. Mi chiamo… Wait, let’s do this in English. I’m Bernhard Warner, filling in for Alan. Today’s newsletter comes to you from the Eternal City.

Speaking of the e-word…let’s take a look in the crystal ball this morning. Not just any crystal ball. This one says “property of Goldman Sachs” on the bottom of the glass.

Goldman is pretty bearish on the U.S. and global economy, which is a warning we should pay close attention to as we near the kick-off of another corporate earnings season. Yes, Q1 results start coming out next week.

Goldman economists have slapped a “below consensus” label on its growth forecasts for the United States, Canada and Europe. That shouldn’t come as too much of a surprise. To recap: runaway inflation, supply-chain snags and the choppy COVID recovery were already conspiring as of late last year to jolt the global economy in 2022. But then war broke out in Ukraine in late February, plunging the world into an epic energy crunch, and forcing economists to rip up their estimates as it became apparent households would have to cut back on spending and businesses would curtail investments.

Goldman now says the odds of a recession in the U.S. stand at 38%. Disclosure: the Goldman models have been forecasting the likeliness of a U.S. downturn at anywhere between 35-40% since the war broke out—in other words, the situation has gotten no better in recent days, even as oil prices stabilize.

That’s because just about everyone on Wall Street is predicting oil prices will surge again ahead of summer driving-season, particularly if Western powers slam Moscow with more sanctions, and if they specifically target Russia’s energy exports. A reminder: I covered the global winners/losers scenario of surging oil prices in the latest issue of Fortune.

Worth mentioning this morning is just how destructive rising energy prices are to consumer-driven economies. (In the U.S., the consumer is the engine, responsible for about 70% of GDP.) Goldman calculates that every $10-per-barrel rise in real oil prices subtracts about 0.15% in growth from the U.S., Canadian and European economies. Brent crude is at about $109 this morning. If it were to climb to about $150 this summer, as some predict, that would likely wipe 60 basis points off growth in the three regions.

The good news/bad news take is that energy inflation will mean the economies of these three powers will undoubtedly underperform over the next few quarters, but that factor is “unlikely to trigger a recession of [its] own,” writes Goldman’s chief economist Jan Hatzius. We have to attach an asterisk to Europe, however. Any kind of cut in Russian gas to the eurozone would “likely” sink the bloc into recession, Hatzius says.

So, we know the consumer is in trouble, and that businesses will have to adapt too. And that adds up to bad news for investors. Goldman is sticking with its 4,700 year-end forecast for the S&P 500, which implies less than 4% growth for the rest of the year. Its worst-case scenario is 3,600, which would mean the benchmark has plunged into bear territory.

That’s the Goldman “recession scenario.”

I told you it was pretty bleak. But the sun is shining here. It’s Rome, after all.

Have a nice day, everyone. There’s more news below.

Bernhard Warner


Freezing out Russia

International condemnation continued to rain down on Moscow yesterday as capitals around the world attempted to process what took place in Bucha, where the Russian military apparently carried out atrocities on Ukrainian civilians. President Biden doubled down, calling Vladimir Putin a "war criminal." Also yesterday, the U.S. Treasury halted Russia's government accounts at U.S. banks, a maneuver designed to put the country in a kind of free-cashflow vice and theoretically force the Kremlin to take financing away from its war machine and towards servicing its debt. Fortune

Hunger crisis

Floods, droughts, Islamist terrorists, runaway cereal prices and record-low crop yields. All of the above are slamming large parts of West Africa, conditions that have created an unprecedented hunger crisis across Burkina Faso, Mali, Niger, Chad and Nigeria. The bleak figure could rise to 38 million by June, aid agencies warn. Reuters

A note from the corner office

Jamie Dimon yesterday issued his annual letter to shareholders, and again the JPMorgan Chase CEO did not hold back. He sees risks ahead—not just for Corporate America, but for the American consumer and for investors. Will Daniels in Fortune breaks it down. Bonus read: these bosses topped the CEO pay list. Fortune


Elon Markets Hypothesis

Bloomberg columnist Matt Levine has had this great theory about the markets which he calls the "Elon Markets Hypothesis." Elon as in, yeah, Mr. Musk. The theory goes that "financial assets are valuable not based on their cash flows but on their proximity to Elon Musk." And, as Levine points out, "few things are closer to Elon Musk than Twitter, but now it is, you know, 9.2% closer than it was before." I read this yesterday as the Twitter share price went on a tear following disclosure that Musk isn't just the biggest personality on Twitter, he's the biggest shareholder. Levine's analysis of the deal, and what could happen next, is well worth your time. Bloomberg


As we touched on last week, investors love stock-splits. The exception: GameStop. What do investors hate? When the management team kills the pre-announced share-buy-back. Exhibit A: Starbucks. Howard Schultz is back as CEO, and his first move was to pull the plug on the $20 billion buy-back plan. Shares fell 3.7% as investors figured this must mean there's bigger problems at the pricey—well, pricey to your Rome-based correspondent—coffee chain. Wall Street Journal

The 4-day workweek recruitment drive

Hospitality app specialist Qwick was on the brink of collapse in the early days of the COVID pandemic when the startup was forced to lay off roughly 80% of its staff. With people traveling again, Qwick is on the road to recovery, and re-hiring. One of the keys to its recruitment drive: offering a four-day workweek. CEO Jamie Baxter tells Fortune he's already seeing big results.   Fortune

This edition of CEO Daily was edited by Bernhard Warner.

This is the web version of CEO Daily, a newsletter of must-read insights from Fortune CEO Alan Murray. Sign up to get it delivered free to your inbox.

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