Goldman Sachs now increases the odds of a recession happening due to the most recent job report and assessment.
Even the most optimistic observers of the U.S. economy are now taking the latest jobs data seriously.
A team of economists at Goldman Sachs, led by Jan Hatzius, has increased their assessment of the probability of a U.S. recession in the next 12 months from 15% to 25%.
This revised outlook comes after the release of a July employment report that the Goldman team described as “weak across the board.”
In the past, the Goldman economists have consistently downplayed the risk of an economic downturn.
However, the disappointing nonfarm payrolls data released on Friday has reignited concerns that the Federal Reserve may not be able to lower interest rates quickly enough to prevent a recession from occurring.
This reversal in sentiment from one of the U.S. economy’s biggest cheerleaders underscores the growing worries about the country’s economic trajectory.
Goldman now expects the central bank to cut borrowing costs by 25 basis points in September, October, and December, although Hatzius believes investors shouldn’t feel too concerned, pointing out that policymakers can always slash more aggressively if necessary.
There’s also a decent chance weak job numbers for July end up being a one-off rather than the start of a “new trend,” according to the economists.
“It is usually a mistake to infer too much from one jobs report absent a major shock that abruptly changes the picture,” they said, adding that much of the weakness last month was a result of temporary rather than permanent layoffs.
Other Wall Street economists are anticipating an even more dovish shift from the Federal Reserve, with the CME FedWatch tool indicating over 99% odds of a 50-basis-point rate cut in September.
Investors appear to be growing increasingly concerned about the latest disappointing jobs data, with the S&P 500 and Nasdaq both experiencing significant declines of around 3% on Monday following the report’s release.
Similar to the Goldman Sachs team, Dennis DeBusschere, the chief market strategist at 22V Research, believes the underlying economy remains relatively healthy.
However, he warns that a short-term market selloff is likely as investors grapple with the implications of the weak July jobs numbers.
DeBusschere cautioned that while recession risk remains low, albeit higher than the prior week, it would not be prudent for investors to try and capitalize on this view in the near term.
This suggests he expects market volatility and uncertainty to persist as the economic data is re-assessed.
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Applications for unemployment benefits now surge to new highs, a sign that the white-hot labor market is starting to cool off.
First-time applications for unemployment benefits rose last week to 231,000, the highest level since August, per CNN.
Thursday’s data also showed that the number of continuing claims, or applications from people who have filed for unemployment for at least one week, was 1.78 million.
That’s an increase of 17,000 from the prior week, according to the Bureau of Labor Statistics.
The latest numbers come less than a week after the monthly jobs report showed the US economy added just 175,000 positions in April, less than economists expected and a steep drop-off from prior months.
US employers have now added an average of 245,500 jobs per month, versus 2023’s 251,000-per-month average.
Still, hiring remains strong. Although the unemployment rate ticked up to 3.9% last month, it’s the 27th consecutive month that the jobless rate has held under 4%, matching a streak last seen in the late 1960s.
Weekly jobless claims data tends to be volatile but, while one week’s worth of data “does not a trend make,” said Chris Rupkey, chief economist at Fwdbonds.
“We can no longer be sure that calm seas lie ahead for the US economy if today’s weekly jobless claims are any indication.”
“Company layoffs are picking up, hinting at caution on the part of companies as they weigh the outlook for the second half of the year,” he wrote in a note Thursday.
The Federal Reserve has been battling inflation by raising its key lending rate in the hopes of slowing the economy.
While the labor market has so far resisted those efforts, remaining white hot for the past 18 months despite 11 rate hikes from the central bank, Fed Chair Jerome Powell said last week that demand has “cooled from its extremely high level of a couple of years ago.”
Ian Shepherdson at Pantheon Economics said in a note Thursday: “We’d need to see at least a month of elevated readings to convince us that the trend really has turned.”
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Also Read: A Giant Company Now Announces Unexpected Layoffs in Virginia
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