Another torn report! After raising it a week ago, Goldman Sachs lowered the likelihood of a US recession again

Goldman Sachs has now lowered its probability of a US economic recession to 20% after previously raising it earlier. This adjustment comes as the latest labor market data has prompted a reevaluation of the economic outlook.

Earlier this month, Goldman Sachs economists raised their probability of the US falling into an economic recession from 15% to 25%. This came after the July non-farm payroll report in the US showed an increase of 114,000 jobs, below expectations. This figure was lower than the revised 179,000 in June and also below the market expectation of 185,000.

This report has sparked concerns about the world's largest economy and exacerbated the sharp decline in US stocks earlier this month, although the losses were quickly recovered.

The report also triggered the "Sam Rule," an indicator of a recession warning, which suggests that the initial phase of an economic recession has begun when the three-month moving average of the US unemployment rate is at least 0.5 percentage points higher than the low point of the past 12 months.

Initially, Goldman Sachs cited this as a reason for increasing the probability of an economic recession, but the bank changed course last Saturday, stating in a report that "there are no signs of an economic recession in the data released since August 2," leading them to lower the probability of an economic recession to 20%.

This includes the July retail sales report, which showed a 1% increase in retail sales compared to the expected 0.3%, and the number of initial jobless claims for the week was lower than expected. These data have shifted market sentiment, reflected in the late-week rebound in global stock markets.

Goldman Sachs economists stated last Saturday, "Sustained expansion will make the US look more like other G10 economies, where the success rate of the Sam Rule is less than 70%." They pointed out that some smaller economies, including Canada, have seen significant increases in unemployment rates during the current cycle but have not fallen into a recession.

Claudia Sahm, Chief Economist at New Century Advisors and the inventor of the Sam Rule, stated that she does not believe the US is currently in a recession, but further weakness in the labor market could push the US into a recession.

Goldman Sachs economists mentioned that a "healthy non-farm payroll report on September 6 could" lead them to lower their probability of an economic recession to 15%, a forecast that has remained at 15% for nearly a year before August.

They added that unless there are other adverse surprises in the employment report, Goldman Sachs is more confident in their prediction of a 25 basis point rate cut at the Federal Reserve's September meeting rather than a 50 basis point cut.

The FedWatch tool from the Chicago Mercantile Exchange (CME) shows that the market has fully priced in the expectation of a rate cut by the Federal Reserve in September, but the probability of a 50 basis point cut has decreased to 28.5%.

Minneapolis Fed President Kashkari stated that he is open to a rate cut at the next meeting as the possibility of a too-weak labor market is increasing. Kashkari said in an interview, "The risk balance has shifted, so discussions about a possible rate cut in September are appropriate." Kashkari stated in June that it may not be necessary to cut interest rates before the end of this year. However, the unemployment rate has risen from 3.7% at the beginning of the year to 4.3% in July, indicating a greater risk of economic slowdown. Kashkari said that if there is no evidence of weakness in the labor market, if the unemployment rate remains in the range of 3.7% to 3.8%, he wouldn't even discuss whether to cut interest rates now. On the contrary, the situation has changed because inflation is making progress, and there are some worrying signs in the labor market. Nevertheless, Kashkari still stated that he sees no reason to cut rates by more than 25 basis points, as the layoff rate remains low and the number of people applying for unemployment benefits has not shown significant deterioration.

Rashmi Garg, Senior Portfolio Manager at Abu Dhabi Capital, stated on Monday that she expects the Fed to cut rates by 25 basis points in September, "unless we see a significant deterioration in the labor market in the employment report on September 6."