Goldman Sachs raises recession odds to 25%, but there’s a catch

Rising unemployment and weaker consumer spending have raised fears of an imminent recession hitting the U.S. economy, but Goldman Sachs doesn’t buy it.

The megabank's economists acknowledge that recession risks have grown, but not enough to raise alarm bells. They've raised the odds of a U.S. recession next year to 25%, up from 15%.

“We continue to see recession risk as limited not only because the data look fine overall and we do not see major financial imbalances,” economists led by Jan Hatzius wrote in a report to investors.

At the heart of Goldman’s forecast is the premise that “job growth will recover in August” and that the Federal Reserve will only need to make a quarter-point rate cut.

This is in stark contrast to recent calls by several economists to lower the federal funds rate by as much as 0.75% in September.

Calls for large and rapid rate cuts are a response to recent government data that showed employers added just 114,000 workers in July—the weakest pace since the pandemic.

Worse, the unemployment rate increased from 4.1% to 4.3%, the highest in nearly three years, triggering a recession indicator known as the Sahm Rule.

While Goldman’s economists were confident the job market would recover in August, they cautioned that another month of negative data could lead to a 0.5% rate cut in September.

In the meantime, investors and the Fed are in an anxious wait-and-see mode.

Sept. 18 is a long way away

The Federal Open Market Committee’s next scheduled meeting is on Sept. 17-18. According to future markets, it's virtually guaranteed that the Fed will cut rates—the only question is by how much.

The same future markets pin a 69% chance on a 0.75% rate cut at the September meeting.

Anxiety about what the Fed will do next ramped up earlier this week as the stock market experienced its worst rout since the Covid crash, following the Japanese stock market’s worst day in decades.

However, the Fed said it wouldn't let stock market woes influence its immediate decisions.

“There’s nothing in the Fed’s mandate that’s about making sure the stock market is comfortable,” Chicago Fed President Austan Goolsbee said in an interview with The New York Times.

While several economists have floated the idea of an emergency rate cut in the coming weeks, others say that decision reeks of desperation—and wouldn’t go over well in the markets.

Janet Yellen, who currently serves as Treasury Secretary and was Fed Chair between 2014 and 2018, acknowledged the danger of an emergency rate cut in 2008.

At the time, she said an emergency cut could “be taken as a sign of panic” and an “overreaction” to negative economic data.