Goldman Sachs has revised its U.S. recession forecast, lowering the probability to 20% shortly after raising it, following fresh labor market data that prompted a reassessment of the economic outlook.
Earlier this month, Goldman economists increased their 12-month U.S. recession probability from 15% to 25%. This adjustment followed the U.S. July jobs report released on August 2, which revealed a weaker-than-expected growth in nonfarm payrolls of 114,000, down from the revised 179,000 in June and below the Dow Jones estimate of 185,000. The disappointing report raised concerns about the robustness of the U.S. economy and led to a sharp, albeit brief, sell-off in the stock market. The report also activated the “Sahm Rule,” a historical recession indicator that signals the beginning of a recession when the three-month moving average of the U.S. unemployment rate increases by at least half a percentage point from its 12-month low. This initial signal led Goldman to increase its recession probability.
However, Goldman revised its outlook on Saturday, lowering the recession probability to 20% after additional data released since August 2 showed “no sign of a recession.” Key factors in this reassessment included a stronger-than-expected 1% rise in July retail sales, compared to an estimate of 0.3%, and lower-than-expected weekly unemployment benefit claims. These indicators contributed to a shift in market sentiment, leading to a global stock market rally late last week.
Goldman’s economists noted that continued economic expansion in the U.S. would align with other G10 economies, where the Sahm Rule has not consistently predicted recessions. They pointed to Canada as an example, where unemployment rate increases have occurred without a recession.
Claudia Sahm, the economist behind the Sahm Rule, stated that while she does not believe the U.S. is currently in a recession, further weakening in the labor market could lead to one.
A strong jobs report on September 6 could lead Goldman to further reduce its recession probability back to 15%, where it stood for nearly a year prior to August. Barring any significant negative surprises in the labor market, Goldman anticipates a 25-basis point rate cut at the Federal Reserve’s September meeting, rather than a more aggressive 50-basis point reduction.
Market expectations for a Fed rate cut in September are fully priced in, though the likelihood of a 50-basis point cut has been reduced to 28.5%, according to CME’s Fed Watch tool. Rashmi Garg, Senior Portfolio Manager at Al Dhabi Capital, expressed a similar outlook, expecting a 25-basis point cut unless the September jobs report reveals significant labor market deterioration.
