Goldman Sachs Strategists Reduce Recession Probability to 15% After Strong September Jobs Report
In a recent note, Goldman Sachs strategists have decreased their 12-month recession probability by 5 percentage points to 15%, bringing it in line with historical averages. This change follows the release of the September employment report, which has shifted the narrative surrounding the labor market.
The strategists noted that the robust job gains in September, along with upward revisions, have alleviated concerns about weak labor demand potentially leading to a further increase in the unemployment rate. The key factor behind this revision was the drop in the unemployment rate to 4.051% in September, slightly below the June level and below the threshold that triggers the “Sahm rule.”
Goldman has been closely monitoring the balance between job growth and labor supply growth, with expectations that while labor supply growth may slow down, it will still be sufficient to stabilize the unemployment rate at 150,000 to 180,000 jobs per month. Although job growth dipped below this range in August, it rebounded to 196,000 in September, with their job growth tracker only slightly below that figure.
The strategists believe that the recent recovery in job growth supports the projection of consecutive 25-basis-point rate cuts by the Federal Open Market Committee (FOMC), with a terminal rate of 3.25% to 3.5% by June 2025. They anticipate that the debate on when to pause and how quickly to reach this terminal rate will likely occur next year during the Fed’s framework review.
While a pause in rate cuts is deemed unlikely in the near future due to the elevated federal funds rate, there is a possibility that the FOMC may proceed more cautiously as it approaches the appropriate terminal rate, adjusting the pace of cuts as needed.
In summary, the improved job growth and lower unemployment rate have led to a reduced recession probability and support the expectation of future rate cuts by the FOMC. This analysis suggests that the labor market is showing signs of recovery, which could have implications for monetary policy and financial markets moving forward.