Goldman Sachs cut its probability forecast for a U.S. recession to 20% shortly after raising it as new jobs data triggered a reassessment of market views on the economy.
Goldman economists earlier this month raised their 12-month U.S. recession probability to 25% from 15% after the Aug. 2 U.S. jobs report for July showed that nonfarm payrolls rose by a less-than-expected 114,000. That was less than June's downwardly revised 179,000 and below the Dow Jones forecast of 185,000.
The report sparked widespread concern about the world's largest economy and contributed to the sharp but ultimately short-lived sell-off in stock markets earlier this month.
It also triggered the so-called “Sahm rule,” a historical indicator that shows that the early stages of a recession have begun when the three-month average of the U.S. unemployment rate is at least half a percentage point above the 12-month low.
Goldman had initially cited this as a reason for increasing the likelihood of an economic downturn – but changed course on Saturday and wrote in a statement that it considered the probability to be reduced to 20 percent because the data published since August 2 showed “no signs of a recession.”
These include retail sales in July, which rose 1 percent (compared to an estimated 0.3 percent), and weekly jobless claims, which were lower than expected.
The numbers triggered a change in sentiment that was reflected in a rally in global stock prices at the end of last week.
“A sustained expansion would make the U.S. more similar to other G10 economies where the Sahm rule applied less than 70 percent of the time,” Goldman economists said on Saturday, noting that several smaller economies, including Canada, have seen significant increases in unemployment rates in the current cycle without falling into recession.
Claudia Sahm, chief economist at New Century Advisors and creator of the rule, told CNBC that she does not believe the U.S. is currently in a recession, but that a further weakening of the labor market could plunge the country into one.
A positive labor market report on September 6 will “probably” prompt Goldman to lower the probability of a recession back to 15 percent. Before August, the forecast had been there for almost a year, the bank's economists said.
Unless there is another negative surprise in the employment report, Goldman will be more confident in its forecast to cut interest rates by 25 basis points rather than 50 basis points at the Federal Reserve's September meeting, they added.
A Fed rate cut in September has already been fully priced in by the markets, but the probability of a 50 basis point cut has fallen to just 28.5 percent, according to the CME's FedWatch tool.
Rashmi Garg, senior portfolio manager at Al Dhabi Capital, told CNBC's “Capital Connection” on Monday that she expects a 25 basis point cut “unless we see a significant deterioration in the labor market in the Sept. 6 employment report.”
— CNBC's Sam Meredith contributed to this story.
Comments are closed.