Key points:
- Goldman Sachs has lowered the probability of a US recession in the next 12 months to 20% from 25%.
- Recent retail sales and jobless claims data have been reassuring, showing no signs of recession.
- Corporate mentions of “recession” during earnings calls are at a near 3-year low.
- Consumer spending remains resilient across income groups, according to recent earnings reports.
- The labor market remains healthy, with layoff discussions among companies in line with pre-pandemic trends.
Goldman Sachs has recently lowered its forecast for the probability of a US recession in the next 12 months from 25% to 20%. This adjustment comes in response to encouraging economic data, particularly in retail sales and jobless claims.
Jan Hatzius, Goldman Sachs’ chief economist, stated, “The last couple of weeks have basically said that the economy is still doing fine.” He noted that when recessions occur, changes typically happen quickly, and the recent weeks of data indicate ongoing economic stability.
The bank’s analysis of second-quarter earnings reports from S&P 500 companies has reinforced this positive outlook. With 93% of these companies having reported, earnings are on track to grow 11% year-over-year, surpassing the initial expectation of 9%. Revenue growth, after accounting for inflation, remains solid at 2.4%.
Corporate America’s discussion of recession has notably decreased. FactSet data shows that between June 15 and August 15, only 28 S&P 500 companies mentioned “recession” during their earnings calls. This figure is significantly below both the five-year average of 83 companies and the ten-year average of 60 companies.
Consumer spending, a key driver of the US economy, appears to be holding steady. Goldman Sachs reported that sales growth at consumer-facing companies, while slowing, remains healthy. Real income growth is described as “solidly positive across all income groups.”
The labor market, another crucial economic indicator, continues to show strength. Goldman Sachs found that about 3% of companies in the Russell 3000 index discussed layoffs during quarterly earnings calls. This percentage aligns with pre-pandemic trends and is down from the 2022 peak of over 6%.
However, the economic picture isn’t uniformly bright. Some companies, particularly those catering to lower-income households, have expressed concerns about consumer pressure due to the macroeconomic environment. Walmart’s CFO, John David Rainey, described the situation by saying, “The consumer is hanging in there.”
Goldman Sachs remains cautiously optimistic about the near future. Hatzius indicated that if the August employment report, due on September 6, is “ok or better,” the bank might further reduce its recession probability to 15%.
The bank also anticipates a potential interest rate cut by the Federal Reserve. Current expectations are for a 25-basis-point cut in September, barring weaker-than-expected jobs data, which could trigger a larger 50-basis-point reduction.
Despite these positive indicators, economists and analysts remain vigilant. The July jobs report had initially raised concerns when it triggered the “Sahm rule,” an indicator suggesting a recession when the three-month moving average of the unemployment rate rises significantly. However, subsequent data has alleviated these immediate fears.
