Goldman Sachs As new labor market data triggered a reassessment of the market's view of the economy, the Federal Reserve lowered its forecast for a U.S. recession to 20% shortly after raising it.
Earlier this month, Goldman Sachs economists raised the probability of a U.S. recession in 12 months from 15% to 25% after the U.S. July employment report on August 2 showed that non-agricultural employment growth was lower than expected by 114,000. That was down from June's downwardly revised 179,000 and below the Dow Jones estimate of 185,000.
The report stoked widespread concerns about the world's largest economy and led to a sharp but ultimately short-lived stock market selloff earlier this month.
It also triggered “Sam's Rule,” a historical indicator that suggests the initial stages of a recession have begun when the three-month moving average of the U.S. unemployment rate is at least half a percentage point above its 12-month low.
Goldman Sachs initially cited this as a reason to raise the probability of a recession, but changed tack on Saturday, writing in a note that it believed the probability dropped to 20% as data released since August 2 showed “no signs of recession.”
These include retail sales in July – which rose 1% versus expectations for 0.3% – and Weekly filing for unemployment benefitslower than expected.
The data triggered a change in sentiment that was reflected in gains in global stock markets late last week.
“Continued expansion will make the U.S. look more like other G10 economies, where the Sam Rule applies to less than 70 percent of them,” Goldman Sachs economists said on Saturday, noting that several countries, including Canada, Smaller economies have seen sharp increases in unemployment without entering recession in the current cycle.
Claudia Sahm, chief economist at New Century Advisors and the inventor of the rule, told CNBC she doesn't think the U.S. is currently in a recession, but further weakness in the labor market could. Pushing it into recession.
The bank's economists said the healthy jobs report on September 6 “could” prompt Goldman Sachs to lower the probability of a recession to 15%, where it had been for nearly a year before August.
They added that unless the jobs report unexpectedly drops again, Goldman Sachs will be more confident in forecasting a 25 basis point rate cut at the Federal Reserve's September meeting rather than a sharp 50 basis point cut.
According to CME's FedWatch tool, the market has fully priced in the impact of the Federal Reserve's interest rate cut in September, but the possibility of a 50 basis point rate cut has been significantly reduced to 28.5%.
Al Dhabi Capital senior portfolio manager Rashmi Garg told CNBC's “Capital Connection” on Monday that she expects a 25 basis point rate cut “unless we see a significant deterioration in the labor market in the September 6 jobs report.”
—CNBC’s Sam Meredith contributed to this article.