Goldman Sachs has revised its U.S. recession forecast, lowering the probability of a recession within the next 12 months to 20%. This adjustment comes just two weeks after the investment bank increased the odds from 15% to 25% following a weaker-than-expected July jobs report.
In a note authored by economist Jan Hatzius, Goldman Sachs highlighted that “the data for July and early August released since August 2 shows no sign of recession.” The investment bank cited several key economic indicators that have led to this reassessment of recession risks.
First, the non-manufacturing ISM index for July showed a rebound, with its employment component entering expansion territory for the first time since November 2023. This suggests that the service sector, which constitutes a significant portion of the U.S. economy, is showing signs of strength.
Second, retail sales in July exceeded expectations, indicating a robust gain in real consumption. This signifies that consumers are continuing to spend, contributing to economic growth.
Third, initial jobless claims declined over the past two weeks, suggesting that the previous rise in claims may have been influenced by temporary factors such as weather and residual seasonality.
Hatzius stated that “the reassuring news on economic activity, layoffs and financial conditions deserves some weight in assessing whether the July jobs report was an indication that recession is starting or just one weak print.”
According to Goldman Sachs, should economic expansion continue, the U.S. could increasingly resemble other G10 economies, where the Sahm rule—a metric used to signal the start of a recession from an unemployment spike—has historically held less than 70% of the time.
Goldman Sachs suggested that if the upcoming August jobs report, scheduled for release on Sept. 6, shows strength, the bank might lower its recession probability estimate further, potentially back to 15%.
Monetary Policy Outlook: Goldman Sachs Eyes 0.25% Cut
Goldman Sachs also weighed in on the Federal Reserve’s monetary policy, expressing increased confidence in its forecast for a 25-basis-point rate cut at the Sept. 17-18 Federal Open Market Committee (FOMC) meeting. The bank does not dismiss the possibility of a 50-basis-point cut if the August jobs report again disappoints.
“With inflation very benign and the labor market fully rebalanced, it has become increasingly obvious that a 51⁄4-51⁄2% policy rate—now the highest across the G10—is excessive,” Hatzius said.
According to the economist, Fed officials can provide nearly as much accommodation by signaling a longer series of 25-basis-point cuts as they could with a single 50-basis-point reduction. Given their historical behavior and recent remarks by Chair Jerome Powell on July 31, where he stated that a 50-basis-point cut “is not something we’re thinking about right now,” it is likely they will opt for this more gradual approach—assuming recession risks remain under control, Hatzius says.
