US recession risk recedes, Fed ‘confident’ to cut 25 bps in September: Goldman Sachs By Investing.com

Goldman Sachs economists revised their 12-month probability of a US recession down from 25% to 20%, citing recent economic data that showed no signs of a recession.

Following July’s jobs report that triggered the “Sahm ​​rule,” the Wall Street giant raised its recession estimates from 15 percent to 25 percent.

The increase was positioned midway between the average long-term recession probability of 15% – based on the historical occurrence of a recession every seven years – and the 35% estimate during the banking crisis in early 2023.

However, recent economic indicators have prompted a reassessment.

Specifically, the ISM non-manufacturing index for July rebounded, with its employment component entering expansion territory for the first time since November 2023, economists noted.

In addition, retail sales for July beat expectations, suggesting strong growth in real consumption. Initial jobless claims also fell in the past two weeks, consistent with the idea that the previous increase was partly due to weather conditions and seasonality residuals. The Financial Conditions Index (FCI) also fell since the wages report.

“When recession hits, it usually hits fast,” the economists explained.

“This means that the reassuring news about economic activity, layoffs and financial conditions deserves some weight in assessing whether July’s jobs report was a sign that the recession is starting or just a weak print.”

In addition, they note that if the US continues its current growth trajectory, it could begin to resemble other G10 economies where Sahm’s rule was less predictive, holding less than 70% of the time. Several smaller economies, such as Canada, Sweden, Norway and New Zealand, saw significant increases in unemployment without slipping into recession.

Looking ahead, Goldman Sachs economists indicate that if the August jobs report, due out on September 6, shows positive signs, they could reduce the likelihood of a recession back to 15%.

On the monetary policy front, economists are more confident in their forecast of a 25 basis point interest rate cut at the September 17-18 FOMC meeting. However, they do not rule out the possibility of a 50 basis point cut if the jobs report disappoints again, given that “with very benign inflation and the labor market fully rebalanced, it has become increasingly apparent that a 5.25%-5.5% monetary policy rate – now the highest in the G10 – is excessive”.

However, economists point out that the current level of the federal funds rate is less meaningful for financial conditions than the medium-term trajectory set by financial markets. They suggest that the Federal Reserve could accomplish a similar adjustment by signaling a series of cuts of less than 25 basis points, as well as delivering a cut of more than 50 basis points.