Goldman Sachs has recently adjusted its forecast for a U.S. recession, lowering the probability from 25% to 20% due to stronger-than-anticipated economic data. This comes shortly after Goldman had raised its recession odds from 15% to 25%, reacting to the weaker July jobs report, which showed a disappointing increase of just 114,000 in nonfarm payrolls.
The initial report stoked concerns about a potential economic downturn, causing volatility in the stock market.
The initial rise in recession probability was partly driven by the activation of the “Sahm rule,” which signals the onset of a recession when the three-month moving average of the unemployment rate climbs at least half a percentage point above the 12-month low.
However, fresh data released after the July jobs report indicated no significant signs of a recession, leading Goldman to reverse its outlook.
The key data points that helped ease recession fears included retail sales for July, which rose by 1% against an expected 0.3%, and lower-than-expected weekly unemployment claims. These positive indicators prompted a shift in market sentiment, leading to a rally in global stocks as investors grew more confident in the economy’s resilience.
Goldman economists noted that the U.S. economy, like other G10 economies, could experience a temporary rise in unemployment without necessarily falling into recession. They highlighted examples of smaller economies, such as Canada, which have seen similar unemployment trends without triggering economic contractions.
Claudia Sahm, the economist who developed the Sahm rule, also agreed that the U.S. was not currently in recession but cautioned that further deterioration in the labor market could change that.
Looking forward, Goldman Sachs suggested that if the September 6 jobs report shows strong labor market performance, they would likely lower the recession probability back to 15%.
They also expect the Federal Reserve to make a moderate rate cut of 25 basis points at its upcoming meeting, provided there are no significant negative surprises in the jobs report. Markets, too, have shifted expectations, pricing in a 25-basis-point rate cut while reducing the likelihood of a larger 50-basis-point cut.
