Goldman Sachs has revised its forecast for the probability of a U.S. recession to 20% after initially raising it, following the release of new labor market data that prompted a reevaluation of economic conditions.
Earlier this month, economists at Goldman increased their 12-month U.S. recession probability from 15% to 25% in response to the U.S. July jobs report on Aug. 2, which showed a lower-than-expected growth of 114,000 nonfarm payrolls. This figure was a decline from the revised 179,000 in June and fell short of the Dow Jones estimate of 185,000.
The report raised concerns about the U.S. economy and contributed to a brief stock market sell-off at the beginning of the month. It also led to the identification of the “Sahm Rule,” an indicator suggesting the onset of a recession when the three-month moving average of the U.S. unemployment rate is at least half a percentage point higher than the 12-month low.
Goldman initially cited this rule as a reason for the increased probability of a recession. However, the bank reversed its stance on Saturday, reducing the odds to 20% due to data released after Aug. 2 showing “no sign of a recession.” This included positive retail sales for July, which exceeded estimates at 1%, and lower-than-expected weekly unemployment benefit claims.
The improved data resulted in a positive shift in market sentiment, reflected in a late-week rally in global stocks. Goldman economists highlighted that continued economic expansion would align the U.S. more closely with other G10 economies, where the Sahm rule has been less prevalent.
Chief economist Claudia Sahm, the rule’s creator, stated that she did not believe the U.S. was currently in a recession but warned that further labor market weakening could lead to one. A strong jobs report on Sept. 6 could prompt Goldman to reduce the recession probability back to 15%, the level it had maintained for nearly a year before August.
Goldman’s economists indicated that barring any negative surprises in the upcoming jobs report, they would be more confident in predicting a 25 basis point rate cut at the Federal Reserve’s September meeting, rather than a larger 50 basis point reduction. Market expectations have already factored in a rate cut in September, with the likelihood of a 50 basis point decrease reduced to 28.5%, according to CME’s FedWatch tool.
Senior portfolio manager Rashmi Garg from Al Dhabi Capital anticipated a 25 basis point rate cut unless there is a significant deterioration in the labor market in the Sept. 6 jobs report.
