Goldman Sachs Downgrades US Recession Probability to 15%, Signaling Soft Landing

After months of heightened recessionary fears on Wall Street, Goldman Sachs has significantly lowered its probability of a US recession to a mere 15%, aligning it with the bank’s “unconditional long-term average.” This optimistic shift is primarily driven by September’s unexpectedly robust nonfarm payrolls report, which revealed a surge of **254,000 jobs** and a decline in the unemployment rate. This data suggests that the US economy may be navigating a **soft landing**, avoiding a significant economic contraction despite the Federal Reserve’s aggressive interest rate hikes.

Key Takeaways: A Softer Economic Outlook

• Goldman Sachs slashed its US recession probability to **15%**, a figure considered the bank’s long-term average, implying a significantly reduced risk of an economic downturn.
• The September jobs report, showing **254,000 new jobs created**, played a crucial role in this revised outlook, exceeding expectations and suggesting a resilient labor market.
• The unexpectedly strong job growth prompted Goldman Sachs to adjust its Federal Reserve interest rate hike predictions, anticipating **smaller, 25 basis point increases** in the “next few meetings.”
• Market expectations for aggressive interest rate cuts could be overly optimistic, potentially leading to market volatility if the economy performs better than anticipated.
• The reduced recession probability suggests a **soft landing** scenario – where inflation cools without a significant economic downturn – may be within reach.

The Impact of the September Jobs Report: A Turning Point?

The stunningly positive September jobs report acted as a catalyst for Goldman Sachs’ revised outlook. The **254,000 increase in nonfarm payrolls**, significantly higher than predictions, surprised many experts. Chief economist Jan Hatzius highlighted that, “**With nonfarm payroll growth of 254k surprising sharply to the upside, prior months revised higher, and household employment also solid, we now estimate an underlying jobs trend of 196k, well above our pre-payrolls estimate of 140k and modestly above our estimated ‘breakeven rate’ of 150-180k.**” This strong jobs growth, coupled with improvements in previous months’ data revisions, points to an underlying strength in the labor market that was previously underestimated. Hatzius further noted, “**The upshot is that the fundamental upward pressure on the unemployment rate may have ended via a combination of stronger labor demand growth and weaker labor supply growth (because of slowing immigration).**”

Revised Fed Projections and Market Implications

This improved economic picture significantly influences expectations regarding the Federal Reserve’s monetary policy. Before the jobs report, speculation centered on the possibility of another **50 basis point interest rate cut** by the Fed. However, Goldman Sachs now aligns with market sentiment, anticipating smaller, **25 basis point increases** in the upcoming meetings. Hatzius commented, “**If Fed officials had known the subsequent data, they probably would have opted for a 25bp cut on September 18. But that doesn’t mean the 50bp cut was a mistake,**” emphasizing that the larger September cut helped bring the fed funds rate closer to appropriate levels considering the economic context, even if the latest data suggests a smaller move might now be preferable. The implication is that the Fed’s aggressive initial approach, while perhaps initially too large given the subsequently improved data, was not fundamentally incorrect in view of ongoing efforts to tackle inflation.

A Soft Landing? Balancing Optimism and Cautiousness

Goldman Sachs’ lowered recession probability points towards a **soft landing** scenario, where the economy slows down sufficiently to curb inflation without triggering a full-blown recession. However, this positive outlook is tempered by concerns from other financial institutions.

Lisa Shalett, chief investment officer at Morgan Stanley, cautions against overly optimistic market projections. The current market pricing anticipates significant interest rate cuts, suggesting a fed funds rate in the **3.25% to 3.5% range by the end of 2025.** This would be a substantial drop from the current level and implies a more aggressive easing of monetary policy than may be warranted. Shalett notes that, “**Something’s gotta give,**” emphasizing that such significant rate cuts would usually be consistent with a recession and not a sustained economic expansion. She warns that, “**both stocks and bonds could be vulnerable if expectations are disappointed.**” Historically, absent a recession, the Fed typically cuts rates by only **125 basis points** in total, lending support to Shalett’s concerns. The discrepancy between market expectations and historical precedent may result in significant market corrections if the economic reality doesn’t align with the more optimistic market assumptions.

The Ongoing Debate: Navigating Uncertainty

The economic outlook remains a subject of ongoing debate. While Goldman Sachs’ optimistic assessment is encouraging, other analysts maintain a more cautious stance. The unprecedented nature of the current economic environment, marked by high inflation and aggressive monetary policy tightening, makes economic forecasting inherently challenging. Factors like future inflation data, consumer spending patterns, and the ongoing geopolitical uncertainties could significantly impact the economic trajectory. While a soft landing is a possibility, the risk of unexpected negative shocks remains, making caution a necessary approach in navigating this complex economic terrain.

The ongoing divergence between Goldman Sachs’ optimistic outlook and the concerns expressed by others highlights the uncertainty inherent in making economic projections. The accuracy of this revised forecast, dependent on various factors playing out in the coming months, should be viewed with appropriate caution. The situation calls for careful monitoring of evolving economic indicators and a careful assessment of risks in navigating the current economic climate.