The US economy can stick a soft landing, but these 4 steps need to happen, says Goldman Sachs

• The US economy has a "feasible if challenging path to a soft landing" next year, Goldman Sachs said.
• "The initial steps along this path have been successful, but there is much further to go in 2023."

The US can avoid a recession and stick a soft landing next year, but four key developments need to happen, according to Goldman Sachs.

Broadly speaking, growth must slow enough to cool down the labor market, bringing down wage growth and inflation and "providing a feasible if challenging path to a soft landing," analysts said in a note dated Friday. "The initial steps along this path have been successful, but there is much further to go in 2023."

Step 1

The first step is ensuring that GDP growth remains below potential, the note said. While fiscal tightening has largely abated, "the large tightening in financial conditions engineered by the Fed should keep GDP growth near 1% in 2023."

And while consumer spending will continue to grow, Goldman expects that to be offset by weakness in housing and other sectors.

Step 2

Next, Goldman listed slower GDP growth as a means to pull down labor demand, and expects a further large decline in job openings next year coupled with a half-percentage-point increase in the unemployment rate.

Analysts see the gap between job openings and workers narrowing from the record peak of 5.9 million seen earlier this year to the threshold of 2 million that they estimate is needed to cool the labor market.

Step 3

Goldman says the third factor is dependent on a rebalancing in the labor market to pull down wage growth, which the bank predicts will fall to 4% by the end of 2023. That rate is near the 3.5% pace that analysts estimate is consistent with 2% inflation, which is the Federal Reserve's target.

Step 4

Lastly, Goldman says the slowdown in wage growth has to drive inflation back down to 2%, which will take longer than 2023. Analysts predict core price inflation will ease from 5% to 3% by December 2023, mostly driven by goods that are seeing less pressure as supply chains recover. Services inflation will also drop significantly but with a longer lag time, they added.

Meanwhile, the Fed is likely to hike rates by 50 basis points in December and follow that with three 25-basis-point hikes next year, lifting raising the fed funds rate to a peak of 5%-5.25%, Goldman said.

"Our recession odds are below consensus even though our Fed forecast is slightly more hawkish than consensus because we expect demand to prove more resilient than expected next year," the note said.