The exceptional jobs report Friday and improving business sentiment has led Goldman Sachs economists to lower their odds of a U.S. recession to 25%.
In their latest research note to clients, Goldman strategists said there was a 25% chance of the U.S. economy entering a recession in the next 12 months, Business Insider reports.
“We have cut our subjective probability that the U.S. economy will enter a recession in the next 12 months from 35% to 25%,” said Goldman Sachs Chief Economist Jan Hatzius.
“Continued strength in the labor market and early signs of improvement in business surveys suggest that the risk of a near-term slump has diminished notably,” Hatzius and other Goldman strategists said.
The Friday job report showed the U.S. added 517,000 payrolls in January, three times analysts’ estimates and a strong indication that the U.S. labor market continues to grow at a strong clip in spite of inflation and rising interest rates.
As well, the ISM Non-Manufacturing Purchasing Managers’ Index rose to 55.2 in January from 49.2 the month before. A reading about 50 is viewed as an indication of growth in the services sector.
The consumer price index, CPI, meanwhile, has steadily fallen over the past six months and now stands at 6.5%, which the Goldman team also pointed to as a positive.
“Progress on price inflation has been particularly rapid in recent months,” Goldman said.
Some traders and economists think the improving economy will convince the Federal Reserve to end its interest rate hikes, while others say the strong jobs data proves that inflation is not yet in check and that the Fed might continue hiking rates well above its 5% target.
Nevertheless, the S&P 500 was up 4% in January, after losing 20% throughout 2022.
International Monetary Fund Managing Director Kristalina Georgieva echoed Goldman Sachs’ optimism Sunday by saying she thinks the U.S. will narrowing sidestep a recession.
However, economists surveyed by both Bloomberg and The Wall Street Journal believe there is a 65% chance for a pronounced U.S. recession in the next year.
Goldman did hedge its improved outlook by saying the historical odds for a U.S. recession during strong economic periods is typically just 15%:
“Even our revised 25% estimate is above the unconditional probability that the U.S. economy will enter a recession in any given 12-month period, which has historically averaged 15%,” the Goldman team said.
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