David Solomon: Goldman’s Economists See 50% Chance Of Recession In Next 24 Months

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Following is the unofficial transcript of a CNBC interview with Goldman Sachs (NYSE:GS) Chairman & CEO David Solomon on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Wednesday, July 20th.

Goldman’s Economists See 50% Chance Of Recession In Next 24 Months, Says David Solomon

KAYLA TAUSCHE: Good morning, David. That summit is happening right here at Nationals Park in Southeast DC. We’re joined by the Chairman and CEO of Goldman Sachs, David Solomon, who is one of the headliners of this two-day event. David, thanks for being here.

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DAVID SOLOMON: Absolutely. Thank you for having me, Kayla. It's good to see you.

TAUSCHE: The mood here in person is rather joyful but the mood on Main Street generally is not. Of the small businesses you pulled 61% say that country is headed in the wrong direction. 89% want action from Washington specifically on inflation. You spent yesterday on Capitol Hill, what do you feel you can accomplish?

SOLOMON: Well, I think we're down here to spend time with these small business owners because small businesses are such a vital part of our economy. They're responsible for such a significant percentage of job growth and job creation in the country and they've had a rough ride candidly over the last few years. The pandemic certainly was very tough. Certainly there was some support for small businesses during the pandemic but as you look forward now with the inflation that exists in the economy, I think people are concerned and they're looking for support or ways that they can weather through this next set of speed bumps that are coming because of the current economic environment. So we've tried to bring these businesses together to give them an opportunity to network, talk about some of the common issues they're sharing, but also to give them a chance today, this is our advocacy day, to bring some of their issues to representatives and so we've got a number of congressmen and senators who are here meeting with these small business owners today to listen to their advocacy for things that can help them move along.

TAUSCHE: You've described the economy right now as bumpy, uncertain, but 93% of small businesses see a recession in the next year. We asked economists, they say there's always a one in six chance of a recession in any given year. But what are your odds right now?

SOLOMON: Well, I, that survey that you're pointing to actually is is the small businesses saying they're concerned about the chance of a recession. So a very high concern. I don't know that they're saying that it's 93% likelihood that a recession would occur—

TAUSCHE: But it’s because of the pain that they're experiencing in running their business day to day.

SOLOMON: Absolutely. Inflation is very, very painful, and it's particularly painful on small businesses. And in that context, I would say that our economists have put out that they think that there's a 30% chance of a recession in the next 12 months and a 50% chance over the course of the next 24 months. That's a high probability. I'm not a good speculator on odds. But as we run our business and we're giving advice to clients everywhere, we're suggesting that the chance of recession is higher now that it's been in quite some time and everybody needs to be a little bit cautious about that. But it is uncertain, and there's no one that can really predict exactly what the future will bring.

TAUSCHE: But you are pulling back a little bit as a company Goldman is hiring less, not replacing people who leave. At what point do you think banks will start laying people off?

SOLOMON: Well, I think you've got to watch the trajectory of what happens from here. You've just watched, you know, earnings come through and, you know, the earnings weren't as good and robust as they were during 2021 and 2020, but there were a whole bunch of exogenous stimulants that were certainly creating more market activity. Our clients have been active, the consumer is still in reasonable shape. But there's no question, we're tightening economic conditions and that will affect the consumer more. The Fed is doing what it needs to do to try to have an impact on on inflation.

TAUSCHE: We’re 150 basis points into that cycle right now. Your president John Waldron yesterday so that he thinks that once the Fed gets to 3%, then the economy can start growing again. What happens between now and that?

SOLOMON: Well, I think it's, I think it's unclear exactly where the Fed will go and exactly what, you know, the coming 12 to 24 months will bring but I do think we're going to see tightening economic conditions, which will slow down growth, there is no question that will slow down growth and what period of time you get things into balance, where the economy can start growing and moving forward. I think it's just very uncertain right now and that's why, you know, we continue to be cautious.

TAUSCHE: There is a war that is still going on in Ukraine. Goldman was one of the first banks to exit its business in Russia. Do you think that there will ever be a time when corporate America returns to Russia, or is that country closed for business permanently?

SOLOMON: Well, it's certainly it's certainly, you know, significantly closed to American business, but it's not, there are businesses that continue to operate in Russia. The financial institutions have moved away. We've we've shut down our business in Russia and continue to unwind the legacy of what we had there. I think it'll be a long, long time. I'm not I'm not good at using words like never, you know, things can happen over periods of time, but certainly for now, you know, Russia is very economically isolated and I expect that to continue for quite some time.

TAUSCHE: Your predecessor Lloyd Blankfein tweeted, “Inflation fighting is mostly the Feds show but there's stuff for the rest of government to do expand immigration to increase the labor force, subsidized childcare for labor participation, eliminate some tariffs, provide less hostile regulation for energy sourcing and transportation.” I mean, you talk to policymakers, do you get the sense that any real progress is being made on any of those fronts?

SOLOMON: Well, I think that's a good list of things that certainly could be helpful in in moving our economic activity in this country forward. I think that policymakers are focused on trying to, trying to take actions that will improve the current economic situation. I certainly know the administration is focused on the economic situation. But what we really need is some bipartisanship to really bring together on some of these policy issues and make some decisions that are a little bit more longer lasting, a little bit more of an investment in kind of the policy grounding that will help us move forward, not just for the next six months, but over the coming decade.

TAUSCHE: But you hold the strings for some of these initiatives. If a refiner came to you and said, the Biden administration is telling us we need to refine more. Would you finance a facility that's been shuttered for several years? What would you do as a bank?

SOLOMON: Yes, we, we, we, we finance, you know, energy in all different ways and I've been very clear, I've said publicly, that we continue to work with energy companies to finance and I've also said publicly that I really believe in US energy independence, and I think we need policy on that side—

TAUSCHE: So the companies you say the money is not there. Are they being disingenuous?

SOLOMON: I think it's I think it's a little bit more complex than that. I think it's, you know, you can't look at just Goldman Sachs or any one individual bank. There's no question that institutional capital has been reallocating or shying away from certain industries and that has an effect. I think we have to think about energy policies and and we have to make sure we have our independence here and we need to be getting risk capital into new technologies that can help us affect the transition over a period of time. We have to do both and I think doing both is very important.

TAUSCHE: How closely do you believe the White House is following what's happening in the economy? How well do you think officials at the White House and within the administration are grasping some of the issues in the economy and I'm wondering how often you speak to them? Visitors logs show that you've met with Steve Ricchetti, a top Biden aide, a couple of times early in the year but how is the conversation gone from there? Has the White House been soliciting input from from your companies?

SOLOMON: I've I've on occasion I mean, I have met with Steve Ricchetti, as you suggest. I haven't had a lot of dialogue with the administration. I think the administration is certainly focused on inflation and the economic environment. Certainly, all Americans are focused on that and I know therefore, the administration is focused on it. I think it's important for the administration to continue to talk to lots of different people with different voices and different perspectives. Obviously, economists and academics but also business people, people running big businesses, people running small businesses. I've learned a lot here in the last few days by spending a lot of time talking to small business owners and asking them about what's going on in their business. What's going on with their input costs. Where do they feel pressure and so there's a lot that you can learn by being out and talking and hopefully that helps and informs good policy actions over time.

TAUSCHE: You mentioned getting a diverse set of voices involved as far as you personally, you've donated to Dave McCormick, who was a Republican Senate candidate who's married to a senior Goldman partner, and you've also donated to WinRed which is the RNC’s digital outfit. So when you're thinking broadly about the midterms, what outcome do you think would be best for business and are you hoping for in November?

SOLOMON: I'm not, I'm not a political prognosticator. I have in the firm consistently supports candidates on both sides of the aisle. I am what you would call a true centrist and and that's what I've been for a long time and that's what I'll always be. But I'm watching the, you know, the elections as everybody else is and I just say four months is a long time from now. And so I'll be watching what goes on over the next few months and obviously will be watching closely in November.

TAUSCHE: And an important voice to keep adding to this conversation. We're so grateful for your time today David with everything you have going on. David Solomon is the Chairman and CEO of Goldman Sachs.