Goldman Sachs Lowers US Recession Probability Amid Strong Job Gains

Goldman Sachs has significantly reduced its forecast for the likelihood of a US recession within the next 12 months to 15 per cent, down five percentage points from previous estimates. 

This adjustment comes in response to a positive employment report from the Labor Department, which highlighted the highest job gains in six months for September and a decrease in the unemployment rate to 4.1 per cent. Jan Hatzius, the chief US economist at Goldman Sachs, noted that the report has "reset the labor market narrative" and alleviated fears regarding a swift decline in labor demand.

Despite the optimistic outlook, Goldman Sachs is still predicting two consecutive 25 basis point cuts to interest rates, projecting a terminal rate between 3.25 per cent and 3.5 per cent by June 2025. Hatzius further stated that the risk of an additional 50-basis point cut has diminished significantly. Financial markets have responded positively to the employment report, with the likelihood of a quarter-percent reduction in rates for November increasing to 95.2 per cent, up from 71.5 per cent prior to the report, according to CME Group's FedWatch tool.

While Goldman Sachs acknowledged that job growth has been volatile, they found no evidence of persistent negative revisions. Hatzius emphasised, "We see no obvious reason for job growth to be mediocre at a time when job openings are high and GDP is growing strongly." However, the brokerage warned that October could be fraught with challenges due to the impact of a hurricane and a major strike, which could affect payroll numbers.

In contrast to Goldman Sachs' positive outlook, economist Mark Spitznagel expressed concerns about the US economy's stability. He suggested that failure to address existing issues could lead to a severe downturn, particularly with a recession looming during the upcoming election season. Spitznagel cautioned that the current market rally may be a temporary phenomenon and could be misleading, highlighting the potential for an economic disaster.

Adding to the concerns, Bloomberg reported that the USD 1.6 trillion motor-vehicle lending market is showing signs of distress, with rising bad debts over the past three years. Delinquency rates for loans that are 30 days or more past due have reached levels not seen since the recovery from the Great Recession in 2010, with subprime borrowers experiencing higher rates of delinquency.