Goldman Sachs lowers U.S. recession probability to 20% after recent data

Goldman Sachs has revised its forecast for a U.S. recession, reducing the probability to 20% following new labor market data that influenced its economic outlook.

This adjustment comes shortly after the firm had increased its recession odds earlier this month based on previous data.

Recession probability raised then reduced

Earlier in August, Goldman Sachs had raised its 12-month recession probability forecast from 15% to 25%. This adjustment was triggered by the U.S. jobs report released on August 2, which revealed that nonfarm payrolls increased by just 114,000 in July.

This figure was significantly below the Dow Jones estimate of 185,000 and a decrease from June’s revised 179,000.

The weaker-than-expected job growth raised concerns about a potential economic downturn and contributed to a temporary stock market sell-off.

The Sahm rule, a historical indicator that suggests a recession has started when the three-month moving average of the U.S. unemployment rate exceeds the 12-month low by at least half a percentage point, was initially cited by Goldman Sachs as a reason for the increased recession probability.

However, in a note released on Saturday, the bank revised its outlook, stating that recent data did not indicate an imminent recession.

Positive economic data prompts reassessment

Recent economic data, including retail sales and unemployment claims, have led Goldman Sachs to lower its recession odds. Retail sales for July increased by 1%, surpassing the forecasted 0.3% rise. Additionally, weekly unemployment benefit claims were lower than anticipated.

These positive indicators have helped to alleviate concerns about an imminent recession and contributed to a rally in global stock markets late last week.

Goldman Sachs noted that ongoing economic expansion could align the U.S. more closely with other G10 economies, where the Sahm rule has proven accurate less than 70% of the time.

The bank also pointed out that several smaller economies, including Canada, have experienced significant increases in unemployment rates without entering a recession.

Claudia Sahm, the chief economist at New Century Advisors and the creator of the Sahm rule, has expressed that she does not currently believe the U.S. is in a recession.

However, she warned that further weakening in the labor market could potentially trigger one.

Future outlook and Federal Reserve considerations

Goldman Sachs indicated that a favorable jobs report on September 6 could lead them to revert their recession probability to 15%, which had been their estimate for nearly a year before the August adjustment.

Additionally, unless there is another negative surprise in the jobs report, Goldman Sachs is expected to lean towards a 25-basis-point rate cut at the Federal Reserve’s September meeting, rather than a more significant 50-basis-point reduction.

Currently, markets have largely priced in a rate cut by the Fed in September, but the likelihood of a 50-basis-point cut has decreased to 28.5%, according to CME’s FedWatch tool.

Rashmi Garg, senior portfolio manager at Al Dhabi Capital, also anticipated a 25-basis-point cut, contingent on the labor market report due on September 6.

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