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The probability of a US recession in the next year has fallen to 15% The likelihood of a US recession in the coming year has declined amid signs of a still-solid job market, according to Goldman Sachs Research. Our economists say there’s a 15% chance of recession in the next 12 months, down from their earlier projection of 20%. That’s in line with the unconditional long-term average probability of 15%, writes Jan Hatzius, head of Goldman Sachs Research and the firm’s chief economist, in the team’s report.  The most important reason for the forecast change is that the US unemployment rate fell to 4.051% in September — below the level in July, when the rate jumped to 4.253%, and marginally below the June level of 4.054%. The unemployment rate is also below the threshold that activates the “Sahm rule,” which identifies signals that can indicate the start of a recession. The rule is triggered when the three-month average US unemployment rate increases by 0.50% or more from its low during the previous 12 months. “The fundamental upward pressure on the unemployment rate may have ended via a combination of stronger labor demand growth and weaker labor supply growth (because of slowing immigration),” Hatzius writes. Nonfarm US payrolls grew by 254,000 in September, a sharp upside surprise to what economists expected. Prior months of payroll reports were revised higher, and household employment data was also solid. The underlying trend in monthly jobs growth is 196,000, according to Goldman Sachs Research, well above its pre-payrolls estimate of 140,000 and modestly above its estimated breakeven rate (the number of new jobs needed to prevent an increase in the unemployment rate) of 150,000-180,000. “This brings the job market signal back into line with the broader growth data,” Hatzius writes. Real GDP grew 3% in the second quarter and an estimated 3.2% in the third quarter. The annual revision to the national accounts in September shows that real gross domestic income (GDI) — a conceptually equivalent measure of real output — has been growing even faster than real (inflation-adjusted) GDP over the last few quarters. The upward revision to income also fed into an upward revision to the personal savings rate, which now stands at 5%. While this is still modestly below the pre-pandemic average of 6%, the gap is explained by the strength of household balance sheets, notably the increase in the household net worth/disposable income ratio. “The revisions to GDI and the saving rate didn’t surprise us, but they strengthen our conviction that consumer spending can continue to grow at solid rates,” Hatzius writes. The strong activity data and the recent rebound in oil prices on fears of escalation of the conflict in the Middle East haven’t changed Goldman Sach Research’s conviction that inflation will cool further. After a period of slightly higher gains, the alternative rent indicators have declined again, reinforcing our economists’ forecast that rent and owners’ equivalent rent (OER) will continue to decelerate. Average hourly earnings grew a faster-than-expected 0.4% in September, but broader signals remain encouraging. Even as Goldman Sachs Research’s wage tracker stands at 4% year-on-year — and the rate compatible with 2% core PCE inflation is estimated at 3.5% — the employment cost index shows that much of the overshoot is related to unionized wages, which tend to lag broader trends. On a related note, the preliminary resolution of the East and Gulf Coast port strike has eliminated a risk to near-term prices. If US Federal Reserve officials had known what was coming, the Federal Open Market Committee might have cut rates by 25 basis points on September 18 instead of 50 basis points, Hatzius writes. But that doesn’t mean it was a mistake. “We think the FOMC was late to start cutting, so a catch-up that brings the funds rate closer to the levels of around 4% implied by standard policy rules makes sense even in hindsight,” Hatzius writes. The latest jobs data strengthens Goldman Sachs Research’s conviction that the next few FOMC meetings (including November 6-7) will bring smaller 25 basis point cuts. Our economists expect the Fed to reduce rates to a terminal funds rate of 3.25% – 3.5%.

Using currencies to hedge recession risk Download Video Transcript How can investors use currencies to hedge against the risk of a US recession? Teresa Alves of Goldman Sachs Research separates the signal from the noise.

How women in the workforce are reshaping the global economy The growth in women’s contributions to the labor force in recent decades is difficult to overstate, and it’s transforming economies around the world. But much remains to be done. Goldman Sachs Research first published a report on women’s participation in the labor force, and the economic possibilities opened up by greater participation, in 1999. The report was led by our then-head of Japan Portfolio Strategy, Kathy Matsui, and titled Womenomics: Buy the Female Economy. Twenty-five years on, Goldman Sachs Research’s Sharon Bell, senior strategist on the European Portfolio Strategy team, and analyst Yuriko Tanaka take a fresh look at those issues on a global scale, in a new report called “Womenomics: 25 Years and the Quiet Revolution.” They find that women’s labor-force participation has grown across many developed economies. Joining the workforce has offered improvements in welfare and opportunity for women, but it has also had an enormous economic impact. Italy’s workforce, for example, would have shrunk if not for greater participation from women. In Japan, women’s growing share of jobs, even as the population shrinks, has kept the labor market stable. What has driven these changes? In previous work, Goldman Sachs Research has shown that family-friendly benefits and policies improve female participation in the workforce, as do changes in legislation on worker protection. More women are highly educated and skilled than ever before, and society and investors now have a greater focus on corporate diversity. Of course, there is still plenty of progress to be made. The propensity to work is lower for women than for men, particularly in emerging markets. And women are more likely to do part-time jobs. Some of these differences may also account for the gender pay gaps that persist, given that part-time work tends to be lower paid. Non-paid work, such as family caregiving, is a major barrier to women’s participation in the workforce, and to equality more generally, including the ability to reach the top echelons in corporations, academia, or politics. Non-paid work takes up a larger share of a woman’s day in every country. A commonly voiced worry is that as more women work, families find it more challenging to raise children, which reinforces the trend toward lower =birth rates. But the link between women’s workforce participation and birth rates isn’t strong. In recent years, if anything, there has been a modest positive relationship between the two. Perhaps because of better availability of childcare or equality legislation, it is increasingly becoming a social norm, especially in developed economies, for women to work and have children. In fact, as birth rates fall dramatically almost everywhere, and as aging populations become a growing source of concern for governments and investors, women’s labor-force participation is more critical to the global economy than ever. In the absence of a major productivity boost, if economies aren’t to shrink, they will need higher participation by women, older workers, or both. Continued migration may be part of the solution. But UN forecasts, which project shrinking working-age populations in many countries, already assume migration patterns of recent years will continue. Meanwhile, as more women join the labor force, the gender pay gap has edged lower more or less everywhere. Part of the reason the pay gap persists is that women and men tend to do different jobs, have varying levels of experience, and work different hours. But even so, the European Commission reports, the “largest part of the gender pay gap remains unexplained in the EU and cannot be linked to worker or workplace characteristics such as education, occupation, working time, or economic activity.” Women have made significant progress with respect to labor force participation, pay gaps, and leadership roles. But the scarcity of women in the most senior ranks of firms, and especially at the executive level, is notable and persistent. The ratio of women diminishes higher up in the power structure of companies. European companies have had undoubted success in bringing women into their boardrooms: Women make up almost 40% of the average STOXX Europe 600 board. This has been achieved by a combination of quotas (as in Norway, France, Germany) and soft pressure (such as attention from the media). That said, while a focus on boardrooms in Europe has yielded an improved representation of women at that level, that hasn’t been the case at other levels, such as executive director or CEO. While the share of female CEOs is increasing, the base is low and the numbers remain small.   Different sectors show different rates of progress (or lack thereof) on employing women. In Europe the share of women in construction and in the sciences has risen in recent years (for construction, it’s from a low base) whereas it has fallen for tech. In the US, the share of women employees in technology and financial services (high-paying industries) has fallen. While much remains to be done, there are reasons to expect women’s participation in the workforce, as well as pay and opportunities at the highest ranks, to continue to increase. Women’s participation fell during the pandemic but has generally more than recovered since. While pay gaps are high in older age groups, even here the gaps have narrowed slightly, and there is a steady climb on most corporate-related metrics.

Is US consumer spending losing momentum? US consumer spending is showing signs of slowing. But that’s more of a return to normal than an indication that a downturn is looming, according to Goldman Sachs Research. Some recent consumption data has appeared soft. Real personal consumption expenditure rose 2.6% in April from the same month a year ago, compared with a pace above 3% last year. Nominal retail sales increased by just 0.1% in May, while spending in prior months was revised down. Even so, Joseph Briggs, who jointly leads the Global Economics team in Goldman Sachs Research, says the US consumer remains healthy. In part, that’s because of relatively high levels of employment and household wealth, and low levels of debt. The team forecasts 2.5% real (inflation-adjusted) disposable income growth for the US consumer in the fourth quarter of 2024, year over year. The healthy outlook for the consumer is one of the reasons Goldman Sachs Research thinks the odds of a recession are still quite low — at about 15%, which is roughly the historical average. “A soft landing both for the consumer and the overall economy is clearly the most likely outcome,” Briggs says. We talked to Briggs about the state of the US consumer, why corporate America has been downbeat on consumption expenditures, and the outlook for the overall economy. How does slower consumer spending growth fit into your overall outlook? Spending growth has slowed from above 3% in the second half of last year to a trend rate of probably around 2% today. This is basically what we’re forecasting for 2024 overall. But I would consider this slowdown in the pace of spending growth as more of a normalization and not really a weakening. A 2% pace of real spending growth overall is basically in line with historical trends. It’s by no means a bad thing for the economy. This is roughly what we’d expect, given where we are in the current cycle — a normalization from an unsustainable pace in the second half of last year. Is the labor market still a positive for the consumer? We’ve rebalanced from an extremely tight labor market to a labor market that’s still fairly tight by historical standards. By most tightness measures, we’re at, or maybe a touch below, where we were in 2019. But to keep perspective, 2019 was considered the hottest labor market in postwar US history. I expect the labor market to be a big driver of income growth and therefore spending for the rest of 2024. So it will be pretty good for the consumer. Our forecasts are still for about 175,000 job gains per month for the rest of this year. We’re expecting that wage growth is going to slow to only 3.5% by year-end. What this means is continued job growth and strong real wage growth should support real household cash flows.  To be sure, the labor market is also our biggest downside risk. Any incremental deterioration would probably lead to a weaker consumer outcome. To put some numbers around that, our research tells us that each percentage point rise in the unemployment rate lowers overall spending growth by about 0.6 percentage points. This is driven by a 1.2 percentage point pullback for bottom income households but only a 0.4 percentage point pullback for top income households. Are household balance sheets in good shape? They are. Going back to 2019, prior to the pandemic, we’ve seen a 50% increase in home prices and a 70% increase in equity prices. It’s hard to have a bad balance sheet outcome following these types of asset price gains. If you take our standard wealth effects model that tries to translate asset price changes into spending growth, we estimate a 0.3 percentage point boost to spending over the next year, versus about a 0.1 percentage point drag on spending over the last year. So we view this as an incremental source of strength and a driver of spending in 2024. What do you make of comments from companies about a consumer slowdown? There’s been quite a divergence between the way companies have viewed the consumer and what the macro data have shown for maybe the last year and a half. This divergence certainly accelerated in the first quarter, when a lot of companies called out that weakness. It’s a bit of a puzzle, and there are probably a number of reasons that contribute to this divergence. First, publicly traded consumer companies tend to have more of a skew to the lower-end consumer relative to overall spending. Even though we’re not seeing lower-income households as worse off, we’re certainly not seeing them as a source of strength to drive above-trend spending growth. Second, consumer-facing companies with exposure to the housing-related spending have probably experienced headwinds recently, given that the housing market has slowed significantly due to higher rates. A third point is that disinflation, particularly for goods prices, makes year-over-year nominal comparisons are a little bit more challenging. I think that has probably lowered revenue growth reported by some public companies. The last reason for the divergence is that services spending has outperformed goods spending over the last year, and consumer service companies skew more toward small businesses than the large public companies that are featured heavily in earnings calls and reports. What might change your views on the consumer or upset your forecasts? I don’t really see a lot of upside risk to our base case from here. There’s no clear catalyst that would prompt an acceleration in spending growth back to 3% or 4%. Saving rates are already low. There’s no fiscal expansion coming in the next couple of quarters that would provide a boost to spending. I don’t think the labor market is going to accelerate again from here and cause job growth and wage growth to rise above their recent trends.  At the same time, though, I think the case is pretty strong for the consumer to continue at a roughly on-trend pace of spending