Goldman Cuts Us Recession Risk Following a Retail Sales, Jobs Data

Goldman Sachs Group Inc. has lowered its estimate of the likelihood of a U.S. recession within the next year, reducing it from 25% to 20%. This adjustment follows the release of recent data on retail sales and jobless claims, which indicate a stronger-than-expected U.S. economy.

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According to a report released by Goldman Sachs economists, led by Jan Hatzius, if the upcoming August jobs report, scheduled for release on September 6, shows favorable results, the firm might reduce its recession probability even further, potentially down to 15%. This would return the estimate to the level it maintained for nearly a year before an upward revision on August 2.

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The latest data has highlighted the resilience of the U.S. economy, which has, in turn, fueled a rally in the stock market. Last week, equities experienced their strongest performance of the year, driven by dip buyers capitalizing on recent market declines. Notably, retail sales in July saw their most significant increase since early 2023, underscoring robust consumer spending. Additionally, separate government data revealed that the number of new applications for unemployment benefits was the lowest since early July, further reinforcing the notion of economic strength.

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Goldman Sachs’ economists expressed increased confidence that the Federal Reserve will implement a 25-basis-point interest rate cut at its September policy meeting. However, they also noted that if the September 6 jobs report delivers another unexpected downside surprise, the Fed might consider a more aggressive 50-basis-point reduction.

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The updated outlook from Goldman Sachs reflects a growing sense of optimism regarding the U.S. economy’s ability to avoid a recession, even as it navigates a challenging global economic environment. The reduction in recession probability is a positive sign for investors, businesses, and policymakers who have been concerned about the potential for an economic downturn.

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The recent data releases have provided important signals about the state of the U.S. economy. The robust retail sales figures for July indicate that consumer spending, which accounts for a significant portion of U.S. economic activity, remains strong. This is a critical factor in sustaining economic growth, as consumer spending drives demand for goods and services, leading to job creation and investment.

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The decline in jobless claims is another encouraging sign, suggesting that the labor market remains resilient despite ongoing uncertainties. Low levels of unemployment benefit claims typically indicate that fewer people are losing their jobs, which can contribute to consumer confidence and, in turn, support continued spending.

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The potential for a 25-basis-point rate cut by the Federal Reserve is also noteworthy. If implemented, such a move would be seen as a cautious step toward providing additional support to the economy without risking a significant increase in inflation. However, the possibility of a more substantial 50-basis-point cut remains on the table, particularly if the jobs report on September 6 shows further weakness in the labor market.

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Goldman Sachs’ revision of its recession probability aligns with the broader market sentiment that the U.S. economy may be more resilient than previously thought. This shift in outlook is likely to influence investor behavior in the coming weeks, as market participants weigh the potential for continued economic growth against the risks of a slowdown.

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The report also underscores the importance of upcoming economic data in shaping the Federal Reserve’s decisions. With the central bank closely monitoring indicators like employment and inflation, the data released in early September will play a crucial role in determining the course of monetary policy. If the jobs report shows strong employment gains and wage growth, it could reduce the likelihood of a larger rate cut, as the Fed may opt to maintain a more cautious approach.

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On the other hand, if the data reveals signs of weakness, the Fed may feel compelled to act more aggressively to prevent a slowdown. This balancing act highlights the challenges facing policymakers as they seek to navigate a complex economic landscape.

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In conclusion, Goldman Sachs’ decision to lower its recession probability reflects a growing confidence in the U.S. economy’s ability to withstand current challenges. The recent data on retail sales and jobless claims suggest that consumer spending and the labor market remain strong, providing a solid foundation for continued growth. While uncertainties remain, particularly regarding the Federal Reserve’s next move, the outlook appears more optimistic than it did just a few weeks ago. Investors and policymakers will be closely watching the upcoming jobs report for further clues about the direction of the economy and monetary policy.

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