Many who are hoping for a recession in the U.S. economy are likely to be disappointed. Just three days ago, a new report released by Goldman Sachs indicated that the U.S. economic growth is stable, with the risk of recession having dropped to 15%.

Goldman Sachs has revised the probability of a U.S. recession within 12 months down to the unconditional long-term average of 15%, a level that had been maintained before the unemployment rate jumped from 4.054% in June to 4.253% in July. The most significant reason for this is the unemployment rate falling to 4.051% in September, slightly below the level in June and the threshold for initiating the "Sam Rule".

Furthermore, due to an unexpected large increase of 254,000 in non-farm employment, the employment numbers for the previous months were revised upwards, and household employment remained stable. The current estimate for the underlying employment trend is 196,000, significantly higher than Goldman Sachs' previous estimate of 140,000, and slightly above the estimated "break-even rate" of 150,000 to 180,000. As a result, the fundamental upward pressure on the unemployment rate may have ended through a combination of stronger labor demand growth and weaker labor supply growth (due to the slowdown in immigration).

Advertisement

This brings the employment market signals back into alignment with broader growth data. Not only did the second quarter's real GDP grow by 3.0%, but the third quarter is expected to grow by 3.2%.

Moreover, the annual revision to the national accounts in September showed that over the past few quarters, the growth rate of real domestic income (conceptually equivalent to the measure of real output) has even exceeded that of real GDP. The upward revision of income also led to an increase in the personal savings rate, which now stands at 5%.

Although this is still slightly below the pre-pandemic average of 6%, this gap can be explained by the strength of household balance sheets, particularly the increase in the ratio of household net worth to disposable income. The revisions to GDI and the savings rate are not surprising, but they reinforce the expectation that consumer spending can continue to grow at a robust pace.

Strong activity data and the recent rebound in oil prices due to concerns over the escalation between Israel and Iran have not shaken our belief that (core) PCE inflation will continue to decline. After a period of slight increases, alternative rent indicators have fallen again, reinforcing the prediction that rents and OER will continue to decelerate.

Although the average hourly earnings growth in September was 0.4%, faster than expected, the broader signals remain encouraging. The wage tracker index shows a year-over-year increase of 4.0%, but the Employment Cost Index indicates that most of the remaining overshoot is related to union wages, which often lag broader trends, and is consistent with the rate estimated by Goldman Sachs at 3.5%, which aligns with the 2% core PCE inflation rate. Related to this, the preliminary resolution of the strikes at ports on the East Coast and the Gulf Coast has eliminated a short-term upward price risk.If Federal Reserve officials had known the subsequent data, they might have chosen to cut interest rates by 25 basis points on September 18th. However, this does not mean that a 50 basis point cut was a mistake.

Goldman Sachs believes that it is already too late to start lowering interest rates, so even in hindsight, it is reasonable to add more cuts to bring the federal funds rate closer to the level of around 4% suggested by standard policy rules.

Nevertheless, recent data has indeed strengthened the expectation that the next few meetings (including November 6th to 7th) will bring smaller 25 basis point rate cuts. Although the market has also fully repriced this view, with the market-implied terminal federal funds rate still slightly below the forecast of 3¼-3½%, the risk of an economic recession has further decreased, and term premiums may rise further unless the United States sees a belated but unlikely fiscal adjustment.

Entering the final month of the campaign, the outcome of the U.S. presidential election remains too close to call. Average opinion polls over the past month show that Vice President Harris is leading former President Trump by less than one percentage point in Pennsylvania, a potential turning point state. Although the presidential race has not changed much over the past two months, the possibility of a divided government has increased.

In the Senate, Republicans are certain to win in West Virginia and increasingly likely to win in Montana. If there are no other changes in party control, Republicans will win with a majority of 51 to 49 seats. In contrast, Democrats seem to be in the lead in the House of Representatives, either according to prediction markets or general congressional votes. A divided government would reduce the likelihood of significant changes in economic policy, and the market may take comfort from this when the U.S. economy is performing well.

A 50 basis point interest rate cut by the Federal Reserve helps to clear the global monetary easing cycle.

Among the G10, it is expected that the European Central Bank and the Bank of England will join the Bank of Canada and the Riksbank in consecutive 25 basis point rate cuts. The outlook has also changed, with the Reserve Bank of New Zealand expected to cut rates by 50 basis points twice starting this Wednesday, while the Reserve Bank of Australia has begun to shift in a more dovish direction; the first rate cut is expected in February 2025, with the risk倾向于 an earlier start in November 2024. Japan is a clear exception, with the Bank of Japan still aiming for further policy normalization, although this goal is easily affected by unexpected downward inflation.The Federal Reserve's shift is more significant for central banks in emerging markets, as they have long been focused on the US dollar exchange rate. However, the interest rate curves in most emerging markets do not reflect a very aggressive easing cycle. The market is most likely underestimating the possibility of more substantial rate cuts in Mexico, Poland, Hungary, South Korea, and India. Mexico's nominal policy interest rate stands at 10.5%, with core inflation close to the 3% target, and the Monetary Policy Committee may adjust the pace of rate cuts to 50 basis points at the November meeting. In contrast, Brazil is still in a rate-hiking mode, and we expect the policy interest rate to peak near 12%. Assuming the central bank successfully reanchors inflation expectations and the currency, Brazil could offer investors an extremely attractive opportunity by early 2025.

The most aggressive monetary policy response to the Federal Reserve's pivot comes from China. At first glance, this may seem surprising, as China continues to implement capital controls, which should provide a greater degree of monetary policy independence, meaning that Federal Reserve policies should be more important than in other emerging markets.

However, due to ongoing cyclical weakness, China also needs more accommodative policies the most, leading Goldman Sachs to revise down its 2024 GDP growth forecast to 4.7% and continue to predict a more subdued 4.3% for 2025 (by Chinese standards).

The extent to which this shift will impact growth largely depends on the yet-to-be-announced fiscal stimulus measures. Currently, Goldman Sachs' China team estimates that monetary policy measures will bring a 0.4 percentage point boost. Fiscal policy will have a more significant impact, but the specific effect will depend on the scale and form of the upcoming fiscal package.

Although the market has already taken credit for the economic good news, if the fundamental economic forecasts come true, returns may still remain positive.

Goldman Sachs' US equity strategists have raised earnings forecasts and currently expect the S&P 500 to rise to 6,000 points by the end of the year, while Asian equity strategists believe that the rally in Chinese stocks may continue as policymakers introduce further stimulus measures in the coming weeks.Goldman Sachs' interest rate and credit strategists anticipate that by the end of the year, long-term interest rates will gradually rise, and spreads will gradually narrow. Finally, Goldman Sachs' oil strategists still expect Brent crude oil prices to remain between $70 and $85 per barrel—even though they are concerned that an escalation in the Israel/Iran situation could lead to a temporary spike in prices, far exceeding this range.