Goldman Sachs Raises Probability of U.S. Recession to 25%

The economists at Goldman Sachs have increased the probability of the U.S. economy entering a recession within the next 12 months from 15% to 25%. Despite this adjustment, they emphasize that the risk of a recession remains limited. The team led by Chief Economist and Head of Global Investment Research, Jan Hatzius, explained in a report to clients that the U.S. economy appears generally stable. Additionally, the Federal Reserve has sufficient latitude to lower interest rates should future data indicate a worsening economic situation. There is a possibility that the Fed can act swiftly if it turns out that they have waited too long to cut rates. Last week, the Bureau of Labor Statistics released its latest employment report, which showed that job growth in the U.S. slowed to 114,000 positions in July, less than the 175,000 forecasted by the economists at the London Stock Exchange Group. Furthermore, the unemployment rate unexpectedly rose from 4.1% to 4.3%, the highest level since October 2021. The Goldman Sachs economists expressed the expectation that job growth would recover in the current month. This could prompt the Fed to cut interest rates by 25 basis points. However, if the August employment report is as weak as July’s, a larger rate cut of 50 basis points in September is possible. According to Goldman Sachs' current forecast, a 25 basis point rate cut by the Federal Reserve is expected in September, November, and December. Although the Fed left interest rates unchanged at the last meeting, the central bankers signaled their readiness for a cut in September if economic data indicates a sustained easing of inflation. Investors have already fully priced in this possibility. Fed Chairman Jerome Powell stated in a post-meeting press conference that the test for a rate cut lies in whether the totality of the data, the evolving outlook, and the balance of risks lead to greater confidence in declining inflation and a stable labor market. "If that test is met, a rate cut could be on the agenda at our next meeting in September," Powell added.