Goldman Sachs revised its forecast of a U.S. economic recession. It reduced the likelihood to 20% after new data on the labor market influenced their outlook.
The firm increased the odds of a recession earlier in this month, based on data from previous months.
Probability of recession is raised and then reduced
Goldman Sachs raised their 12-month forecast of recession probabilities from 15% to 25 % earlier in August. The U.S. Jobs Report released on August 2 revealed that the nonfarm payrolls had increased only by 114,000 during July.
The figure is significantly lower than the Dow Jones’ estimate of 185,000, and it represents a drop from June’s revised 179,000.
Weaker-than-expected growth in employment raised fears of a possible economic slowdown and led to a temporary sell-off on the stock market.
Goldman Sachs cited the Sahm Rule, an historical indicator which indicates a recession when the U.S. three-month moving median unemployment rate is greater than the 12-month lowest by half a percent, as the reason for increased recession probabilities.
In a statement released Saturday, however, the bank revised their outlook and stated that recent data does not suggest an impending recession.
Reassessment prompted by positive economic data
Goldman Sachs has lowered its odds of a recession based on recent economic data including retail sales, unemployment claims and other indicators. Retail sales in July rose by 1%, exceeding the expected 0.3% increase. Weekly unemployment benefits were also lower than expected.
The positive signs have contributed to the rally on global stock exchanges late last week, helping to ease concerns over an impending recession.
Goldman Sachs stated that the U.S. could be more aligned with the other G10 countries, in which the Sahm Rule has been accurate only less than 70% the times.
Bank of America also noted that several small economies including Canada have seen significant increases in their unemployment rates, without going into a recession.
Claudia Sahm is the head economist of New Century Advisors, and creator of the Sahm Rule. She has stated that the U.S. does not appear to be in recession.
She warned, however, that a further weakening of the labor market may trigger one.
Federal Reserve and the Future Outlook
Goldman Sachs said that an upbeat jobs report for September 6 would lead to them lowering their estimated recession probability from 15% to 15%. This was their previous estimate of the likelihood since August.
Goldman Sachs will also be leaning towards a rate reduction of 25 basis points at September’s Federal Reserve meeting. This is less than the more substantial 50-basis point cut.
According to CME’s FedWatch, the markets are currently pricing in a Fed rate cut in September. However, the probability of a cut in the range of 50 basis points has dropped to 28,5%.
Rashmi G., portfolio manager senior at Al Dhabi Capital also predicted a cut of 25 basis points, pending the Labor Market Report due September 6.
As new information becomes available, this post Goldman Sachs reduces U.S. Recession Probability to 20% After Recent Data may change.
