A customer shops for groceries at a Walmart store in Secaucus, New Jersey, USA, Tuesday, March 5, 2024.
Gabby Jones | Bloomberg | Getty Images
Goldman Sachs The Federal Reserve has lowered its forecast for the probability of a US recession to 20% shortly after raising it, as the latest labour market data caused markets to reassess their view of the economy.
Earlier this month, Goldman economists raised their chances of the U.S. falling into a recession within the next 12 months to 25% from 15%, following the release of the August 2 report that showed a weaker-than-expected increase of 114,000 nonfarm payrolls in July. That was down from a downwardly revised 179,000 increase in June and below the Dow Jones forecast of 185,000.
The report sparked widespread concern about the world’s largest economy and led to a sharp (but ultimately short-lived) sell-off in stock markets at the start of the month.
It also triggered the “thumb rule,” a historical indicator that the early stages of a recession have begun when the three-month moving average of the U.S. unemployment rate is at least half a percentage point above its 12-month low.
Goldman initially cited this as a reason to raise the probability of a recession but reversed course on Saturday, writing in a note that it now sees the probability falling to 20% because data released since Aug. 2 “does not suggest a recessionary outlook.”
This also includes July retail sales (up 1% versus the expected 0.3% increase) and lower-than-expected weekly jobless claims.
These figures prompted a change in public sentiment, which was reflected in a rise in global stock prices last weekend.
“If the expansion continues, the U.S. will end up looking more like other G10 economies where the Sum rule has been in place for less than 70 percent of the time,” Goldman economists said Saturday, noting that some smaller economies, including Canada, have seen large increases in unemployment in the current business cycle without falling into recession.
Claudia Thurm, chief economist at New Century Advisors and the author of the rule, told CNBC that she doesn’t think the US is currently in a recession, but a further weakening of the labor market could put it in a recession.
Goldman economists said a strong jobs report on Sept. 6 would “probably” increase the likelihood of lowering the probability of a recession to 15 percent, where it remained for about a year until August.
Barring further downside in the jobs report, Goldman will be more confident in expecting a 25 basis point rate cut at the Federal Reserve’s September meeting, rather than a larger 50 basis point cut, they added.
According to CME’s FedWatch tool, the market is fully pricing in a Fed rate cut in September, but the probability of a 50 basis point cut has fallen to just 28.5%.
Rashmi Garg, senior portfolio manager at AlDhabi Capital, told CNBC’s “Capital Connection” on Monday that she expects a 25 basis point cut “unless the Sept. 6 jobs report shows a material deterioration in the labor market.”
—CNBC’s Sam Meredith contributed to this story.
