Goldman Sachs economists raise ‘limited’ risk of US recession to 25% chance: report

Economists at Goldman Sachs raised the likelihood of the US economy slipping into a recession within the next 12 months from 15% to 25% while continuing to view the risk of recession as limited, according to a report.

Goldman economists led by Jan Hatzius, the firm’s chief economist and head of global investment research, wrote that they “continue to see recession risk as limited” in a report to clients on Sunday that was reviewed by Bloomberg.

They said the US economy appears to be “fine overall” and noted the Federal Reserve has ample room to cut interest rates if needed and can do so rapidly if upcoming data releases show signs that economic conditions are worsening amid worries the Fed has waited too long to lower rates.

Last week, the Bureau of Labor Statistics released its latest jobs report that  showed US job growth slowed to 114,000 in July, less than the 175,000 gain forecast by London Stock Exchange Group economists. The unemployment rate also rose unexpectedly from 4.1% to 4.3%, the highest level since October 2021.

The Goldman Sachs economists said they think job growth will improve this month and that will prompt the Fed to cut interest rates by 25 basis points, or 0.25% percentage points, though they noted that if the August jobs report is as sluggish as July’s, they could opt for a larger cut.

“The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks,” the Goldman economists wrote. “If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September.”

Goldman’s forecast for Federal Reserve interest rate cuts currently projects 25-basis-point cuts in September, November and December. 

Though the Federal Reserve left interest rates unchanged at policymakers’ meeting last week, central bank officials have signaled an openness to a cut in September if economic data shows that inflation is continuing to ease. Investors have priced in a 100% chance of a rate cut next month.

“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,” Federal Reserve Chair Jerome Powell said at a post-meeting press conference.

“If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September,” he added.