Ever since it became clear that 2022 wouldn’t pan out in the way expected, likely around the time Russian tanks rolled into Ukraine, the looming potential for a recession has been the talk of lower Broadway.

While many top investment banks have argued the U.S. economy will fall into a recession by 2023 as the Federal Reserve raises interest rates to combat inflation, Goldman Sachs has remained on the fence.

Economists for the 153-year-old bank put the probability of a U.S. recession within the next 24 months at 38% in April, striking a far less bearish tone than many Wall Street peers. But on Monday, Goldman analysts led by Jan Hatzius admitted that risks to the U.S economy have grown over the past month.

The investment bank still isn’t calling a recession just yet. A strong U.S. consumer may help the Fed secure a “soft landing”—where inflation is kept at bay without instigating an economic downturn—in 2022 as interest rates rise, Goldman says.

“Recession risk has risen,” Goldman analysts wrote in a Monday note. “The financial health of the private sector may ultimately determine whether policy tightening will tilt the economy into a downturn.”

The silver lining

During the pandemic, stimulus programs led to a multitrillion-dollar savings surplus for U.S. consumers, leaving the average American in a strong financial position. Despite the unwinding of fiscal support and four-decade high inflation, Goldman analysts say U.S. households remain flush with cash as a result of the fiscal support, a strong recovery in wages, and a historically low unemployment rate.

The analysts pointed to the “private sector financial balance”—the difference between consumers’ total income and total spending—as evidence for their claim. The figure has remained high and positive throughout the pandemic, meaning that households can continue to spend without the need to borrow or draw down asset holdings, Goldman says.

U.S. households boasted a financial surplus worth 4.0% of GDP in the fourth quarter of 2021, compared to a 2.8% average from 1985 to 2019, according to the investment bank’s data.

“We also find that excess savings are not confined to the household sector, as cash holdings increased substantially during the pandemic across small businesses, highly levered firms, and large corporations,” the analysts wrote.

The Goldman team argued that “soft landings are more common” historically when private-sector financial balances are positive like they are today—even when inflation remains an issue.

“Surpluses generated today by households and high-yield businesses bolster the outlook for consumer spending and business investment—and will help offset the [Fed] policy and inflation headwinds,” the analysts wrote. “The healthy private sector financial balance widens the Fed’s narrow runway for a soft landing.” 

To Goldman’s point, U.S. consumer spending, which accounts for over two-thirds of U.S. economic activity, jumped 1.1% in March, according to the Commerce Department.

But despite the investment bank’s positivity when it comes to the strength of the U.S. consumer, Americans’ personal savings rate has collapsed to below pre-pandemic levels in recent months, Federal Reserve data shows. 

The U.S. personal savings rate, which represents consumers’ personal savings as a percentage of their disposable income, is now the lowest it’s been since December of 2013 as Americans grapple with rising gas, food, and rent costs.

For Liz Ann Sonders, the chief investment strategist of the financial services firm Charles Schwab, it’s a sign that the “savings boom is over.” If Sonders is right, Goldman’s predictions of a soft landing for the U.S. economy as the Fed raises rates, ensured by strong consumer balance sheets, could fall short.