Goldman Sachs Cuts U.S. Recession Odds to 20% Amid Improving Economic Signals

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As a seasoned analyst with over two decades of experience under my belt, I’ve seen my fair share of economic rollercoasters. The recent revision by Goldman Sachs on its forecast for a U.S. recession, from 25% to 20%, is an intriguing development. The market data we’ve been witnessing recently has been nothing if not unpredictable.

As an analyst, I’ve recently observed that Goldman Sachs has readjusted its prediction regarding a potential U.S. recession, lowering the likelihood to 20%. This revision stems from recent labor market data, which has triggered a fresh examination of the overall U.S. economic landscape. (Report by Jenni Reid for CNBC)

According to an article on CNBC, Goldman Sachs raised its probability of a U.S. recession within the next 12 months from 15% to 25%, following the release of the July jobs report on August 2nd, 2024. The report showed that nonfarm payrolls increased by just 114,000, lower than expected and a decrease from the revised June figure of 179,000. This underwhelming data caused anxiety about the strength of the U.S. economy, leading to a temporary but significant drop in the stock market.

The less-than-strong employment figures triggered the “Sahm rule,” a tool used to predict economic downturns. This rule goes off when the three-month average of U.S. unemployment rate increases by at least 0.5 percentage points over its lowest point in the past year. At first, Goldman Sachs saw this as justification for boosting the likelihood of a recession. But then, on August 17, they changed their stance, reducing the predicted chance of a recession to 20%, citing more recent data that showed no indications of an economic downturn, according to CNBC.

The reevaluation was prompted by economic indicators performing better than expected, such as a 1% rise in retail sales for July, significantly more than the predicted 0.3%. Additionally, weekly unemployment benefit claims came in lower than projected. These upbeat results influenced market sentiment and led to a stock market rally worldwide, as reported by CNBC towards the end of last week.

CNBC added that Goldman Sachs economists pointed out that America’s prolonged economic growth might cause it to resemble other G10 nations, in which the Sahm rule has shown less accuracy, being correct less than 70% of the time. For instance, economies similar to Canada have seen substantial increases in unemployment rates during this period without slipping into a recession.

According to Claudia Sahm, the economist who came up with the Sahm rule, she’s not convinced that the United States is experiencing a recession at this moment. Yet, she cautioned CNBC that if there’s more deterioration in the job market, it might lead the economy into a slump.

As a researcher, I find myself aligning with Goldman Sachs’ perspective that a robust jobs report on September 6 could potentially lower their forecasted recession probability back down to 15%. This figure had been steady for almost an entire year before the recent adjustment. The bank also expressed optimism, indicating that unless an unexpected negative event occurs in the upcoming jobs report, they anticipate the Federal Reserve to execute a modest 25-basis-point rate cut at their September meeting instead of a more aggressive 50-basis-point reduction. CNBC reported that market participants have fully incorporated a rate cut in September, with the probability of a 50-basis-point cut now standing at only 28.5%, as per CME’s FedWatch tool.

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2024-08-19 18:08