Goldman Sachs Lowers US Recession Odds to 15% Following Positive Jobs Report

Goldman Sachs strategists have revised their 12-month recession probability downward by 5 percentage points to 15%, now aligning with the historical unconditional average. This adjustment follows the September employment report, which has shifted perceptions regarding the labor market.

The strategists noted, “Strong September job gains and upward revisions have temporarily alleviated concerns that labor demand may be insufficient to prevent a continued rise in the unemployment rate.”

Prior to this change, Goldman’s recession probability was at 15% right before the unemployment rate rose from 4.054% in June to 4.253% in July. A significant factor influencing the revision was the drop in the unemployment rate to 4.051% in September, which is slightly below the June level and beneath the threshold that activates the “Sahm rule.”

Goldman, like many investors, has been keeping a close watch on the interplay between job growth and labor supply growth. While labor supply growth is anticipated to decelerate, it is expected to remain sufficiently high that an addition of 150,000 to 180,000 jobs per month will be needed to maintain stability in the unemployment rate.

Although trend job growth fell below this range in August, it rebounded to 196,000 in September. Their job growth tracker, which combines survey results and hard data, is only slightly below that figure.

“Despite the volatility in job numbers, we believe they can be viewed as reliable because there is no clear indication of ongoing negative revisions, and the birth-death adjustment now appears reasonable,” the strategists remarked.

“More broadly, we see no evident reason for job growth to be lackluster, given the high number of job openings and robust GDP growth.”

Goldman acknowledges that the labor market remains weaker than it was before the pandemic. Indicators of labor market tightness suggest that the risks associated with the unemployment rate are balanced.

Nonetheless, the decline in unemployment observed in September provides initial proof that the previous rise may have been influenced by a temporary surge in immigrant labor supply, which is beginning to stabilize.

According to Goldman’s analysts, this recovery in job growth reinforces the belief that the Federal Open Market Committee (FOMC) is poised for a series of 25-basis-point interest rate cuts. They continue to anticipate consecutive cuts, targeting a terminal rate between 3.25% and 3.5% by June 2025.

“If job growth remains strong and the unemployment rate does not increase further, discussions regarding when to halt and the pace of cuts will likely emerge in next year’s Fed framework review,” they noted.

They also believe that a pause in the rate-cutting cycle is improbable in the near term, as the federal funds rate is still elevated. However, strategists caution that the FOMC may adopt a more cautious approach as it nears the appropriate terminal rate, adjusting the rate cut pace as necessary.