Goldman Sachs Predicts 25% Chance of US Recession: Are We Safe or Sorry?

The economic outlook in the United States is currently a hot topic of discussion, especially after the recent adjustments made by Goldman Sachs regarding the likelihood of a recession. Even though they have increased the probability of a recession within the next 12 months from 15% to 25%, the economists at Goldman Sachs still maintain that the risk of a downturn remains fairly limited. This cautious optimism is backed by their belief that the Federal Reserve has adequate tools at its disposal to mitigate any emerging economic threats, primarily through interest rate cuts.

Goldman Sachs’ economists, led by Jan Hatzius, reported that the U.S. economy is “fine overall,” despite some worrying signs. One of the key indicators causing concern is the recent jobs report from the Bureau of Labor Statistics. This report indicated that U.S. job growth slowed to 114,000 in July, a figure that fell short of the anticipated 175,000 gain forecasted by London Stock Exchange Group economists. Additionally, the unemployment rate unexpectedly rose from 4.1% to 4.3%, marking the highest level since October 2021. These numbers have prompted further scrutiny into the health of the labor market and its implications for the broader economy.

Goldman Sachs analysts are optimistic that job growth will improve in the coming months. They predict that the Federal Reserve will respond to any downside risks by cutting interest rates by 25 basis points in September. However, if job growth continues to falter and the August employment report mirrors July’s lackluster performance, they suggest that a more aggressive rate cut of 50 basis points could be on the horizon. This proactive stance is seen as necessary to cushion the economy against any potential downturn.

In line with this cautious approach, Goldman Sachs has forecasted a series of 25-basis-point cuts in Federal Reserve interest rates for September, November, and December. While the Federal Reserve left interest rates unchanged in their recent policymakers’ meeting, there is a clear signal of openness to a rate cut next month if economic data indicates that inflation is easing. Investors have already priced in a 100% chance of a rate cut next month, reflecting the market’s anticipation of the Fed’s responsive measures.

Federal Reserve Chair Jerome Powell has also indicated that the central bank is contemplating a rate cut next month, contingent upon forthcoming economic data. This potential move underscores the Fed’s commitment to staying agile and responsive to evolving economic conditions. The anticipation of these rate cuts is seen as a preemptive step to maintain economic stability, mitigate recession risks, and ensure that growth remains on a positive trajectory.

As the economic data continues to unfold, all eyes will be on the Federal Reserve’s next steps. The combination of cautious optimism from Goldman Sachs and the Federal Reserve’s readiness to adjust interest rates as needed provides a measured and proactive approach to navigating the uncertain economic landscape. Whether these measures will be sufficient to stave off a recession remains to be seen, but for now, the tools are in place to manage any emerging risks.