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Goldman Sachs GS+1.69% lowered its odds of a recession thanks to healthy retail sales and low weekly jobless claims, in a reversal from a decision to raise the probability of an economic downturn earlier this month.
The chance of a recession in the United States is now at 20%, researchers at the investment bank, led by chief economist Jan Hatzius, said in a note released Saturday. They had previously increased the odds of a downturn to 25% from 15% after the July jobs report triggered alarm bells.
In particular, the results of last month’s jobs report aligned with Sahm’s rule, which says that a recession starts when the three-month moving average of the unemployment rate is 0.5 percentage points or more above its lowest during the previous 12 months.
But a new round of economic data “shows no sign of recession,” Goldman said. The non-manufacturing ISM index, which measures the economic condition of service-based companies, rebounded and its employment component grew for the first time since November 2023.
Retail sales surged unexpectedly in July, rising 1% from the prior month — and well above the projected 0.3% growth, the Commerce Department reported last week. Meanwhile, weekly jobless claims fell by 7,000 from a week earlier.
These positive tidings confirmed to Goldman strategists that last month’s increase in the unemployment rate was likely driven by a rise in supply of labor, probably from immigration, rather than a slowing labor market.
“When recession strikes, it usually strikes quickly,” Goldman said. “This means 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.”
If the August jobs report, which will be released on Sept. 6, looks “reasonably good,” the analysts said they will probably cut their recession probability back to 15%, where it sat for almost a year up until early this month.
Researchers also said they have become more confident that the Federal Reserve will cut interest rates by just 25 basis points (to 5%-5.25%) at the next meeting of the Federal Open Market Committee in mid-September. However, another weak jobs report could spur a 50 basis point cut, they noted.
What other researchers are saying
Bank of America BAC-0.02% chief Brian Moynihan said in an interview last week that the bank’s research team “does not have any recession predicted anymore.” But Moynihan warned of slower spending and a dispirited consumer if the Fed doesn’t carry out its rate cuts soon.
Earlier this month, JPMorgan Chase JPM+0.87% also raised its odds of a recession by the end of this year to 35% from 25%, pointing to slowing inflation and higher unemployment data that was released on Aug. 2.
JPMorgan’s readjusted probability of a recession doesn’t mean, however, that a downturn is imminent, with JPMorgan chief global economist Bruce Kasman telling clients that key recession indicators still aren’t there.
“More fundamentally, the vulnerabilities normally associated with a recession break — sustained profit margin compression or credit market stress, and energy or financial market shocks — are notably absent,” Kasman said.