The strategists at Goldman Sachs have lowered their 12-month recession likelihood to 15%, in line with the historical unconditional average, by 5 percentage points. This update was made after the labour market picture was reframed by the September employment data.

Prior to July, when the unemployment rate rose from 4.054% in June to 4.253%, Goldman's recession likelihood was 15%. The change is mostly due to the September unemployment rate decline to 4.051%, which is significantly below the June level and below the cutoff point for the "Sahm rule."

Like many investors, Goldman said it had kept a careful eye on the ratio of labour supply increase to job creation. Even while the labour supply is predicted to expand more slowly than anticipated, it will nevertheless rise to the point where 150,000 to 180,000 jobs per month are required to keep the unemployment rate stable.

Trend job growth returned to 196,000 in September after falling below this level in August. Their survey-based and hard-data-based job growth tracker is only somewhat less than that amount.

The labour market is nevertheless more flexible than it was before to the pandemic, as Goldman concedes. The unemployment rate is nevertheless subject to two-sided dangers, according to measures of the tight labour market.

However, the September unemployment reduction offers preliminary indication that the prior increase was probably caused by the short-term difficulty of adjusting to a brief spike in the supply of labour from immigrants, which is now subsiding.

Goldman's team believes that the Federal Open Market Committee (FOMC) is headed towards a 25 basis point rate reduction, and the rebound in employment growth supports this belief. By June 2025, strategists predict that there will be successive 25bp reductions, resulting in a terminal rate of 3.5% to 3.25%.

Given that the federal funds rate is still high, GS reckons it is unlikely that the rate-cutting cycle will halt very soon. Nevertheless, strategists acknowledge the chance that the FOMC may go more slowly in its pursuit of the ideal terminal rate, modifying the rate of reduction as needed.

(Sources: investing.com, reuters.com)