Goldman Sachs Lowers U.S. Recession Odds to 20%

Goldman Sachs has updated its outlook on the U.S. economy, lowering the recession probability in the next 12 months from 25% to 20%. This revision reflects positive economic signals, including strong retail sales data and fewer jobless claims. Though not entirely reassuring, these indicators have led Goldman Sachs economists, led by Jan Hatzius, to adjust their recession expectations downward.

If upcoming data, particularly the August jobs report released on September 6, continues to show improvement, Goldman may further reduce the recession probability to 15%. This would return to the level seen before the recent upward revision.

Economic indicators and market response

The latest economic data has injected optimism into the market. Retail sales in July saw the most significant increase since early 2023, suggesting that consumer spending remains resilient despite rising prices and borrowing costs. Given that consumer spending drives a large portion of U.S. economic activity, this is a positive sign.

Additionally, jobless claims have fallen to their lowest level since early July, indicating that the labor market remains robust, albeit with some signs of slowing. For example, nonfarm payrolls increased by 187,000 in July, below expectations. This mixed performance keeps the market on alert as investors react to the potential implications for future economic conditions.

The Federal Reserve’s next steps under scrutiny

Goldman Sachs economists are closely watching the Federal Reserve’s next move, anticipating a possible 25-basis-point rate cut at their September meeting; however, the decision hinges on upcoming economic data, particularly the August jobs report. A weaker-than-expected jobs report could push the Fed toward a more significant 50-basis-point cut.

Since March 2022, the Federal Reserve has raised interest rates by 425 basis points, placing the federal funds rate in the range of 5.25% to 5.50%. These rate hikes aim to combat inflation, which, although moderating, remains above the Fed’s 2% target. The Consumer Price Index (CPI) stood at 3.2% in July, while the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred measure, was at 2.8% in June.

Differing perspectives on recession risks

Despite Goldman Sachs’ lowered recession probability, other models offer less optimistic views. Some predict a 50-60% chance of a U.S. recession within the following year. For instance, the Federal Reserve Bank of New York’s model estimated a 57.7% recession probability in July based on various economic indicators, including the inverted yield curve. The yield curve, inverted since May 2022, has historically been a reliable predictor of recessions.

Economist David Rosenberg presents an even bleaker outlook, forecasting an 85% chance of a recession in 2024. His prediction is based on factors such as financial conditions indexes, debt-service ratios, and foreign-term spreads, which he believes signal a significant economic slowdown.

While Goldman Sachs has reduced its recession probability, varying views among economists and models indicate that the risk of a downturn remains a significant concern. The upcoming economic data, particularly the August jobs report, will be crucial in determining whether the U.S. economy is more stable or facing a potential recession shortly.

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