The US economy has been surprisingly resilient this year, but painful bumps are likely coming, said Goldman Sachs CEO David Solomon in an interview with CNBC on Monday morning.
“I think we’re at an uncertain moment,” said Solomon of his current economic outlook. “I think it’s a period to be a little bit cautious.”
Solomon forecast that the US economy could find itself in an environment “that might not be a recession, but it certainly would feel like a recession.” That would mean avoiding a hard landing but still muddling through “sluggish growth and sticky inflation,” he said.
The latest jobs report showed that payrolls have increased by almost double the average monthly gain in the 10 years before the pandemic, while the Federal Reserve’s preferred inflation gauge bounced higher in April. Spending also remains strong.
In this good-is-bad economy, strong employment and higher wages mean higher inflation as companies pass on increased labor costs by raising the price of goods.
Solomon said on Monday that while he doesn’t expect Fed policymakers to raise interest rates to fight inflation at their meeting later this week, he does think that strong economic indicators and stubborn inflation could mean more hikes in the future. Those hikes, he said, will “probably make the economic environment a little bit more challenging.”
If the United States does fall into recession, he added, it would likely wouldn’t happen until the end of this year or the beginning of 2024.
Regional banking outlook
Real estate is the single largest asset class in the world and after 14 months of interest rate hikes by the Fed, “there’s no question that the real estate market — in particular, commercial real estate — has come under pressure,” said Solomon.
About 65% of commercial real estate lending falls into the mid-sized banking system, he said.
“In this environment, that will constrain additional lending. That makes capital more attractive and it crowds out some economic activity,” he said. “That’s just something we’re going to have to work through. There will probably be some bumps and some pain along the way for a number of participants.”
The collapse of Silicon Valley Bank and Signature bank in March and the May sale of failed First Republic Bank to JPMorgan Chase has drastically changed the outlook for regional banks, and Solomon thinks more consolidation is needed to keep the sector safe.
“I mean, I’m a big believer that there needs to be more banking consolidation,” he said. But the bar for Goldman to “make a bank acquisition would be extraordinarily high,” he added.
More layoffs coming?
Like its Wall Street rivals, Goldman Sachs has been hit by a slump in dealmaking and activity.
Goldman is now preparing for its third round of job cuts over the past year as investment banks grapple with the slowdown, Solomon said on Monday.
“We’re always looking to rightsize the business for opportunity,” he said. “Over the course of the year we’ve been narrowing our headcount just a little bit to rebalance.”
Fewer than 250 jobs are expected to be impacted by the latest round of cost cuts, which will impact a range of employees including managing directors and other senior executives, a source familiar with the matter told CNN.
In January, Goldman Sachs launched much deeper layoffs that were expected to result in the loss of as many as 3,200 employees. Last September, Goldman also let go of underperformers as part of a normal process at the bank.