Goldman Sachs raises U.S. recession odds to 25% from 15%

“We continue to see recession risk as limited,” the Goldman economists led by Jan Hatzius said in a report to clients on Sunday. 

The economy continues to look “fine overall,” there are no major financial imbalances and the Federal Reserve has a lot of room to cut interest rates and can do so quickly if needed, they said.

Last week ended with US jobs data showing that hiring had slowed markedly in July and unemployment had risen to the highest in almost three years, raising concerns of a slowdown and fears the Fed has waited too long to cut interest rates. 

Goldman’s Fed forecasts are less aggressive than those of JPMorgan Chase & Co. and Citigroup. Hatzius’s team expects the central bank will reduce its benchmark by 25 basis points in September, November and December. By contrast, JPMorgan and Citigroup revamped their forecasts to predict policymakers will deliver a half-point cut in September. 

“The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks,” the Goldman Sachs economists said. “If we are wrong and the August employment report is as weak as the July report, than a 50bp cut would be likely in September.”

The economists added that they are skeptical the labor market is at risk of deteriorating rapidly in part because job openings indicate demand remains solid and there has been no obvious shock to spark a downturn.