Goldman boosts recession odds but sees ‘limited’ risk of downturn

Goldman Sachs increased its odds of a recession in the next year Monday following consecutive days of an equity market selloff, though the investment bank sees the risk of a serious downturn as “limited.”

The bank boosted its year-ahead recession probability by 10 percentage points to 25 percent while noting it expects the Federal Reserve to cut interest rates at each of its next three meetings this year.

“We continue to see recession risk as limited because the data look fine overall, we do not see major financial imbalances, and the Fed has 525 [basis points] of room to cut to support the economy,” Goldman Sachs said in an analysis.

Markets opened way down on Monday morning after falling sharply on Friday. 

The Dow Jones Industrial Average of major U.S. stocks was down more than 1,000 points or 2.67 percent as of 10:40 a.m. EDT Monday. The S&P 500 fell more than 167 points, or 3 percent, and the technology-heavy Nasdaq was down more than 580 points, or 3.5 percent.

The initial sell-off on Friday was spurred by a weaker-than-expected employment report from the Labor Department.

Unemployment rose to 4.3 percent in July from 4.1 percent in June as the economy added 114,000 payrolls, shy of the 175,000 economists expected. The number of jobs added to the economy have received significant downward revisions across April, May and June.

“Both payroll growth (114,000 [versus] a 168,000 [second-quarter] average) and household employment growth (67,000) were weak. Catch-up hiring in healthcare accounted for over half of payroll growth.  We now estimate that underlying trend job growth stands at 147,000 per month,” Goldman analysts wrote.

Downward momentum continued through the weekend as international investors sold off stocks on Monday, responding to recent interest rate increases by the Bank of Japan, which have made loans in the Japanese currency less valuable.

The Fed is widely expected to cut interest rates at its next meeting to stimulate economic growth.

Goldman said it expects the Fed to cut rates by a quarter-point at each of its next three meetings in September, November and December.

Investment bankers also said they now believe wage growth has slowed down to “roughly the 3.5 percent pace compatible with 2 percent inflation.”

Average hourly earnings increased by 0.2 percent in July and by 3.6 percent over the past year, they noted.