Customers shop for groceries at a Walmart store in Secaucus, New Jersey, U.S., on Tuesday, March 5, 2024.
Gabe Jones | Bloomberg | Getty Images
Goldman Sachs The International Monetary Fund has cut its forecast for the probability of a US recession to 20% shortly after raising it, as new labour market data prompted a reassessment of market views on the economy.
Earlier this month, Goldman economists raised their 12-month forecast for a U.S. economic contraction to 25% from 15% after the Aug. 2 U.S. jobs report showed nonfarm payrolls rose by 114,000 jobs, less than expected. That was down from a downwardly revised 179,000 in June and below Dow Jones’ estimate of 185,000.
The report raised widespread concerns about the world's largest economy, and contributed to a sharp – but ultimately short – sell-off in the stock market at the beginning of the month.
This also led to the launch of the “Contributor Rule,” a historical indicator that shows that the initial stage of a recession has begun when the three-month average of the U.S. unemployment rate is at least half a percentage point above its 12-month low.
Initially, Goldman Sachs cited this as a reason to raise the odds of an economic slowdown — but changed course on Saturday, writing in a note that it saw the odds lowered to 20% because data since Aug. 2 showed “no sign of recession.”
This included July retail sales – which rose 1%, versus estimates of 0.3% – and weekly jobless claims, which were lower than expected.
These figures led to a change in mood, which was reflected in the rise in global stock prices late last week.
“A continued expansion would make the U.S. look more like other G10 economies, where the less-than-70% rule has held,” Goldman Sachs economists said Saturday, noting that many smaller economies, including Canada, have seen large increases in unemployment rates in the current cycle without entering a recession.
Claudia Sahm, chief economist at New Century Advisors and creator of the rule, told CNBC she doesn't think the U.S. is currently in a recession, but further weakness in the labor market could push it into one.
The bank's economists said a healthy jobs report on Sept. 6 would “likely” prompt Goldman Sachs to cut its recession probability to 15%, where it had been for about a year before August.
Barring another negative surprise in the jobs report, Goldman will be more confident in its forecast for a 25 basis point rate cut at the Fed's September meeting, rather than a larger 50 basis point cut, they added.
Markets have fully priced in the possibility of a Fed rate cut in September, but have reduced the odds of a 50 basis point cut to just 28.5%, according to 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 September 6 jobs report.”
— CNBC's Sam Meredith contributed to this story.
