Goldman Sachs Lowers U.S. Recession Risk Amid Positive Economic Signals
The notion of an impending U.S. recession has been a topic of debate among economists, but recent developments suggest a more optimistic outlook. On Monday, Jan Hatzius, Chief Economist at Goldman Sachs, revised the probability of a U.S. recession over the next 12 months down to 20% from a previous 25%. This adjustment comes just 17 days after he increased the recession risk, prompted by a weaker-than-expected July jobs report.
Shifting Economic Sentiments
The shift in Hatzius' forecast is notable, considering the market jitters caused by the previous increase in recession probability and the unwinding of the yen carry trade, which had global market implications. However, Hatzius now suggests that the U.S. economy may not be facing as dire a situation as previously thought. "The economy is still doing fine," Hatzius stated during an appearance on Yahoo Finance's Catalysts, attributing the improved outlook to strongereconomic data and a robust corporate earnings season.
This favourable economic assessment has also influenced Hatzius' expectations for the Federal Reserve's next move. He anticipates that the Fed will opt for a modest 25 basis point rate cut at its September meeting rather than a more aggressive 50 basis point cut that had been considered amid heightened recession fears.
Positive Economic Indicators
Several recent economic indicators support this more optimistic view. The latest ISM services report, which includes key metrics such as business activity, new orders, and employment, showed a rise to 51.4% in August, up from 48.8% in June. A reading above 50% typically indicates economic expansion, and most companies surveyed reported either stable or gradually improving business conditions.
In addition, the number of new unemployment benefit applications in the U.S. fell to a one-month low last week, continuing a downtrend that began the previous week. This suggests resilience in the labour market, further bolstering confidence in the economy.
Moreover, retail sales data from the Commerce Department revealed a 1% increase in July, marking the largest gain since January 2023. Strong online shopping activity largely drove this growth, more than offsetting a modest 0.2% decline in June sales.
Corporate Resilience and Market Response
Corporate earnings have also provided a boost to market sentiment. Major public companies have generally surpassed sales and profit expectations, with a few shocking disappointments. Outlooks have remained solid, contributing to a sense of stability among investors. For instance, Walmart CFO John David Rainey noted during an appearance on Yahoo Finance's Morning Brief that the retail giant's earnings were better than expected, and the back-to-school shopping season was off to a "good" start.
As a result, Wall Street is gradually moving past the initial shock of the earlier jobs report and is now advising clients to cautiously re-enter the market. According to Jason Draho, Head of Asset Allocation Americas at UBS Global Wealth Management, resilient growth data, particularly in the upcoming August payrolls report, combined with a proactive Fed, could shift market sentiment from fears of a recession to a "Goldilocks" scenario—neither too hot nor too cold.
A Cautiously Optimistic Outlook
The latest economic data and corporate earnings reports suggest that the U.S. economy remains on stable footing despite not entirely dismissing the risk of a recession. Goldman Sachs' revised recession forecast reflects this cautious optimism, indicating that the path ahead may be less rocky than previously feared. Investors and market watchers will be closely monitoring upcoming economic reports and Fed actions as they navigate this evolving landscape.