Goldman Sachs economists have raised their estimation of the likelihood of the United States entering a recession within the next year from 15% to 25%. Despite this increase, they continue to see the risk of a recession as “limited.”
The updated outlook, shared in a report led by Jan Hatzius, the firm’s chief economist and head of global investment research, suggests a cautious but not overly pessimistic view of the U.S. economic situation.
The report, reviewed by Bloomberg, highlighted that while the U.S. economy appears to be “fine overall,” there are concerns regarding recent economic data.
The Federal Reserve has been monitoring the situation closely and has the capacity to reduce interest rates quickly if necessary, especially if upcoming data shows signs of deteriorating conditions.
Recent labor market data has been mixed. The latest report from the Bureau of Labor Statistics revealed that job growth in the U.S. slowed significantly in July, with only 114,000 new jobs added, falling short of the 175,000 predicted by economists. Additionally, the unemployment rate unexpectedly rose to 4.3%, the highest level since October 2021.
Goldman Sachs economists are optimistic that job growth will improve in August, potentially prompting the Federal Reserve to implement a modest 25-basis-point cut in interest rates. However, they caution that if the August job numbers are as disappointing as July’s, a larger cut of 50 basis points may be warranted in September.
Currently, Goldman Sachs forecasts a series of 25-basis-point rate cuts by the Federal Reserve in the coming months, starting in September, followed by further reductions in November and December.
The central bank left interest rates unchanged at its recent meeting, but officials have indicated a willingness to lower rates if inflation continues to ease and if economic conditions justify it.
Federal Reserve Chair Jerome Powell explained the importance of the upcoming economic data in determining the course of action.
At a press conference following the latest policy meeting, Powell noted, “The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market.”
Powell added that if these conditions are met, a rate reduction could be considered as early as the next meeting in September.
Investors have already factored in a high likelihood of a rate cut next month, reflecting the market’s anticipation of the Federal Reserve’s response to ongoing economic trends.