Goldman Sachs Lowers U.S. Recession Odds to 20% After Positive Retail and Jobs Data

A Reversal in Projections

Earlier this month, Goldman Sachs raised its 12-month U.S. recession probability from 15% to 25%, triggered by a weaker-than-expected July jobs report. The report, released on August 2, showed that nonfarm payrolls grew by just 114,000, well below the Dow Jones estimate of 185,000 and down from the revised 179,000 in June. This disappointing data contributed to concerns about an impending economic downturn and sparked a brief stock market sell-off.

The report also activated the "Sahm rule," an economic indicator that suggests the initial phase of a recession has begun when the three-month moving average of the U.S. unemployment rate is at least half a percentage point higher than its 12-month low.

New Data Eases Concerns

However, Goldman revised its outlook downward to 20% on Saturday after stronger-than-expected retail sales and lower-than-expected jobless claims eased fears of a recession. Retail sales for July rose by 1%, significantly outpacing the 0.3% estimate, while weekly unemployment claims remained lower than anticipated.

These positive data points prompted a shift in market sentiment, leading to a global stock rally late last week. Goldman Sachs economists noted in a report that continued economic expansion could align the U.S. more closely with other G10 economies, where the Sahm rule has less predictive power. For example, several smaller economies, like Canada, have seen increases in unemployment rates without entering a recession.

Future Outlook

Claudia Sahm, the economist behind the Sahm rule and current chief economist at New Century Advisors, told CNBC that she does not believe the U.S. is currently in a recession, but cautioned that further weakening in the labor market could push the economy into one.

Goldman Sachs indicated that a strong jobs report on September 6 could lead the bank to further reduce its recession probability back to 15%, where it had remained stable for nearly a year before the recent adjustment in August.

Fed Rate Cut Expectations

Goldman Sachs also reiterated its forecast for a 25-basis-point interest rate cut at the Federal Reserve's September meeting, provided there are no additional negative surprises in the upcoming jobs report. The market has already priced in a rate cut, but expectations for a larger 50-basis-point reduction have decreased to just 28.5%, according to CME’s FedWatch tool.

Rashmi Garg, senior portfolio manager at Al Dhabi Capital, told CNBC’s “Capital Connection” that she expects a 25-basis-point cut unless there is significant deterioration in the labor market in the September jobs report.