After the release of the July jobs report on August 2 led to the invocation of the “Sahm rule,” Goldman Sachs’ 12-month probability of a recession in the United States was revised from 15% to 25%. However, as recent data, including retail sales and jobless claims this past week, indicated no indications of a recession, the investment bank has now readjusted the probability back down to 20%.
The Sahm rule is a recession indicator based on the labour market, which is often used by the central banks.
The continuous growth in the US economy would align it more closely with other G10 economies, where the Sahm rule has been effective less than 70% of the time. In the current economic cycle, several smaller economies, such as Canada, have experienced notable increases in unemployment rates of over 1 percentage point without entering a recession.
Should the August jobs report, set to be released on September 6, demonstrate positive results, there is a likelihood that we would reduce our recession probability to 15%, a level that was sustained for almost a year prior to August 2.
We are now more assured in our projection that the Federal Open Market Committee (FOMC) will opt for a moderate 25 basis point reduction in the funds rate during its meeting on September 17-18. However, a negative surprise in the job market on September 6 could still prompt a more substantial 50 basis point adjustment.
