Goldman Sachs: US Recession Fears Recede as Job Market Shines
Sign up for Global Macro Playbook: Stay ahead of the curve on global macro trends.
The US economy is showing remarkable resilience, leading Goldman Sachs to significantly downgrade its recession probability forecast. Citing a robust job market and strong economic activity, the investment bank now predicts only a 15% chance of a recession in the next 12 months, down from its previous estimate of 20%.
"The most important reason is that the unemployment rate fell to 4.051% in September, marginally below both the June level and the threshold that activates the 'Sahm rule'," wrote Jan Hatzius, chief economist at Goldman Sachs, in a note released earlier this week. This crucial indicator, designed to flag early recession warnings, emphasizes the current strength of the US labor market.
The positive sentiment was further bolstered by September's impressive nonfarm payroll figures. With 254,000 jobs added, the report significantly exceeded economists' expectations. Goldman Sachs estimates the underlying trend in monthly job growth to be 196,000, comfortably surpassing the breakeven rate needed to prevent unemployment from rising.
This robust job growth aligns with broader economic indicators. Real GDP expanded by an estimated 3.2% in the third quarter, following a 3% growth in the second quarter. Additionally, revisions to national accounts reveal that real gross domestic income (GDI), a key measure of economic output, has outpaced GDP growth in recent quarters.
Despite recent oil price spikes fueled by geopolitical tensions in the Middle East, Goldman Sachs maintains its outlook for cooling inflation. The firm points to declining alternative rent indicators and expects rent and owners' equivalent rent (OER) to continue their downward trajectory.
While wage growth remains a concern, the recent resolution of the East and Gulf Coast port strike has alleviated some near-term inflationary pressure.
"Although markets have already taken a lot of credit for the good economic news, returns are likely to remain positive if our baseline economic forecasts materialize," said Hatzius. "Our US equity strategists have lifted their earnings forecasts and now see the S&P 500 rising to 6000 at yearend."