Goldman Sachs Raises US Recession Odds to 30% as Growth Forecasts Weaken

Goldman Sachs has increased its 12-month U.S. recession probability to 30%, citing slowing growth momentum and renewed inflation risks from high energy prices.

This concern is backed by weakening economic data, including a lower GDP growth forecast from the Atlanta Fed, a surprise drop in payrolls, and inflation that remains stubbornly above the Fed's 2% target.

The Federal Reserve is in a difficult position, as it must keep interest rates restrictive to fight inflation, which in turn raises the risk of further slowing the economy and triggering a downturn.

Goldman Sachs recently increased its forecast for the probability of a U.S. recession within the next 12 months to 30%.

This shift in outlook isn't based on a single piece of news but rather a collection of worrying economic signals that suggest the economy is walking a tightrope. Let's break down the key reasons for this growing concern.

First, the engine of the economy appears to be losing steam. A key real-time indicator, the Atlanta Fed's GDPNow tracker, has seen its estimate for first-quarter growth fall from a healthy 3.1% to a more modest 2.0% in just four weeks. This slowdown is supported by other data, like a recent surprise drop in monthly payrolls—the first in a while—and an uptick in the unemployment rate to 4.4%. Consumers also seem to be tightening their belts, as indicated by weaker retail sales.

Second, while growth is slowing, inflation remains stubbornly high. The latest inflation reports show prices are still rising faster than the Federal Reserve's 2% target. Compounding this problem is a recent spike in oil prices, driven by geopolitical tensions. Brent crude oil settled around $100 after a recent spike. High energy prices act like a tax on everyone, squeezing household budgets and increasing business costs, which can both slow growth and fuel more inflation. This creates a risk of stagflation, a challenging scenario for policymakers.

This brings us to the third point: the Federal Reserve's difficult position. The Fed's primary tool to fight inflation is raising interest rates, which makes borrowing more expensive and cools down the economy. However, with growth already slowing, keeping rates high—or raising them further—increases the risk of tipping the economy into a recession. The Fed recently held rates steady, signaling caution, but with inflation still a problem, it has limited room to cut rates and support growth.

So, why only a 30% chance and not higher? A key reason is the continued strength in the services sector of the economy, which includes everything from restaurants to healthcare. A recent report showed this area is still expanding robustly, providing a crucial buffer against weakness in other areas. This resilience is the main reason why the base case scenario is still a 'soft patch' rather than a full-blown recession.

GDPNow: A running estimate of real GDP growth for the current quarter, published by the Federal Reserve Bank of Atlanta. It's updated as new economic data is released.
Stagflation: An economic condition characterized by slow growth, high unemployment, and rising prices (inflation).
Federal Open Market Committee (FOMC): The committee within the Federal Reserve System that is in charge of setting the direction of monetary policy, including interest rates.

Goldman Sachs Raises US Recession Odds to 30% as Growth Forecasts Weaken

Goldman Sachs has increased its 12-month U.S. recession probability to 30%, citing slowing growth momentum and renewed inflation risks from high energy prices.

The Federal Reserve is in a difficult position, as it must keep interest rates restrictive to fight inflation, which in turn raises the risk of further slowing the economy and triggering a downturn.

Goldman Sachs recently increased its forecast for the probability of a U.S. recession within the next 12 months to 30%.

GDPNow: A running estimate of real GDP growth for the current quarter, published by the Federal Reserve Bank of Atlanta. It's updated as new economic data is released.
Stagflation: An economic condition characterized by slow growth, high unemployment, and rising prices (inflation).
Federal Open Market Committee (FOMC): The committee within the Federal Reserve System that is in charge of setting the direction of monetary policy, including interest rates.