In a surprising turn of events, Goldman Sachs has dramatically reduced its forecast for a U.S. recession to 20%, shortly after raising it to 25%. This abrupt shift comes as fresh labor market data prompts a reevaluation of economic outlooks across Wall Street.
The Initial Recession Fears
Earlier this month, economists at Goldman Sachs raised eyebrows by increasing their 12-month U.S. recession probability from 15% to 25%. This decision was largely influenced by the July jobs report released on August 2, which showed nonfarm payrolls growing by a mere 114,000 – significantly below the anticipated 185,000. This underwhelming report sent shockwaves through financial markets, contributing to a sharp, albeit brief, stock market sell-off at the beginning of August. The data also triggered the “Sahm Rule,” a historical indicator suggesting the initial phase of a recession has begun when the three-month moving average of U.S. unemployment rises at least half a percentage point above its 12-month low.
The Unexpected Reversal
However, in a dramatic about-face on Saturday, Goldman Sachs released a note stating they now see the odds of an economic downturn reduced to 20%. The reason? Data released since August 2 showed “no sign of a recession.” This reassessment was largely based on two key economic indicators: 1. Retail sales for July: These rose by an impressive 1%, far exceeding the estimated 0.3%. 2. Weekly unemployment benefit claims: These came in lower than expected, indicating a resilient job market. These figures sparked a renewed sense of optimism, reflected in a rally across global stock markets late last week.
The Sahm Rule Reconsidered
Goldman economists noted that continued economic expansion would make the U.S. situation more comparable to other G10 economies, where the Sahm Rule has been less reliable, holding true less than 70% of the time. They pointed out that several smaller economies, including Canada, have experienced significant unemployment rate increases in the current cycle without entering a recession. Claudia Sahm, the economist who developed the eponymous rule, shared her perspective with financial media. While she doesn’t believe the U.S. is currently in a recession, she cautioned that further weakening in the labor market could potentially push the economy into one.
Looking Ahead: September’s Critical Jobs Report
All eyes are now on the upcoming jobs report scheduled for September 6. Goldman economists have indicated that a healthy report would “probably” lead them to further reduce their recession probability back to 15%, where it had remained for nearly a year before August. Moreover, barring another downside surprise in the jobs report, Goldman is becoming increasingly confident in its forecast for a 25 basis point rate cut at the Federal Reserve’s September meeting, rather than a steeper 50 basis point reduction.
Market Expectations and Fed Watch
Currently, markets have fully priced in a Fed rate cut for September. However, the odds of a 50 basis point reduction have been dramatically slashed to just 28.5%, according to CME’s FedWatch tool. Rashmi Garg, a senior portfolio manager, shared her expectations with financial media, stating she anticipates a cut of 25 basis points “unless we see a sizeable deterioration in the labor market in the Sept. 6 jobs report.”
The Broader Economic Landscape
While Goldman’s revised forecast offers a glimmer of hope, it’s essential to consider the broader economic landscape. The U.S. economy continues to navigate challenges, including ongoing trade tensions, geopolitical uncertainties, and the lingering effects of the global pandemic. The housing market, often a bellwether for economic health, presents a mixed picture. In some regions, first-time homebuyers are aggressively entering the market, driven by a desire to escape rising rental costs. This trend is particularly noticeable in urban areas where buyers are outbidding competitors for homes worth over $1 million at auctions.
The Real Estate Sector’s Role
The real estate sector’s performance remains a crucial factor in assessing overall economic health. Recent data suggests a complex landscape: 1. Urban flight reversal: Some cities are seeing renewed interest from buyers who had previously considered moving to suburban or rural areas. 2. Commercial real estate challenges: The office sector continues to grapple with low occupancy rates as remote work persists. 3. Retail transformation: Shopping centers and malls are reinventing themselves to attract foot traffic in the e-commerce era.
Global Economic Interconnections
While Goldman’s forecast focuses on the U.S., it’s crucial to remember the interconnected nature of the global economy. Economic shifts in major markets like China, Europe, and emerging economies can have significant ripple effects on U.S. economic performance. Trade relationships, currency fluctuations, and global supply chain dynamics all play a role in shaping the U.S. economic outlook. As such, economists and investors alike must maintain a global perspective when assessing recession probabilities.
The Road Ahead
As we move forward, several key factors will shape the economic landscape: 1. Federal Reserve decisions: The central bank’s approach to interest rates and monetary policy will be closely watched. 2. Labor market resilience: Continued strength in employment figures could further reduce recession fears. 3. Consumer spending patterns: As a major driver of the U.S. economy, consumer behavior will be a critical indicator. 4. Geopolitical developments: International events and policy decisions could impact trade and investment flows. Ultimately, while Goldman’s revised forecast provides a more optimistic outlook, economic conditions remain fluid. Investors, policymakers, and business leaders must stay vigilant and adaptable in this dynamic economic environment. As we await the next round of economic data, including the crucial September jobs report, the U.S. economy continues to demonstrate its resilience in the face of various challenges. The coming months will be pivotal in determining whether this optimism is justified or if further economic headwinds are on the horizon.
