Goldman backtracks recession risk

Goldman Backtracks Recession Risk

April 9, 2025 — In a notable shift, Goldman Sachs has dialed back its recession risk forecasts, signaling renewed confidence in the resilience of the U.S. economy. The move follows months of stronger-than-expected data, including robust job growth, steady consumer spending, and moderating inflation—all of which suggest the much-anticipated downturn may not materialize in 2025 after all.

From Red Flags to Green Shoots

For much of the past two years, Goldman Sachs, along with many other Wall Street firms, cautioned about the rising likelihood of a U.S. recession. High interest rates, persistent inflation, and geopolitical uncertainty had created an environment ripe for contraction. At one point in 2023, Goldman placed the probability of a recession within 12 months at 35%—higher than its historical baseline.

Now, however, the firm has slashed that estimate to just 15%, citing “broad-based strength” in economic indicators and a successful soft landing engineered by the Federal Reserve.

“The U.S. economy has shown remarkable resilience in the face of restrictive monetary policy,” said Jan Hatzius, Goldman Sachs’ chief economist. “We believe the risk of a recession has meaningfully diminished as the Fed nears the end of its tightening cycle and inflation continues to decelerate without a major hit to growth.”

Data Driving the Optimism

Several key factors underpin Goldman’s revised outlook:

• Labor Market Strength: Nonfarm payrolls have consistently outpaced expectations, with unemployment holding below 4%. Wage growth, while slowing, remains healthy—helping sustain consumer demand.

• Consumer Confidence: Despite higher borrowing costs, American consumers continue to spend. Credit card delinquencies remain manageable, and retail sales have shown resilience.

• Inflation Cooling: The Fed’s preferred inflation gauge, the Core PCE, has eased toward the central bank’s 2% target. This has given the Fed room to consider rate cuts later in the year, should disinflation trends continue.

• Manufacturing and Services Recovery: The ISM indices for both sectors have stabilized, with the service sector firmly in expansion territory and manufacturing showing early signs of a rebound.

Cautious Optimism

While Goldman’s shift is bullish, the firm still acknowledges potential risks. Geopolitical tensions, particularly in the Middle East and East Asia, remain a wildcard. Additionally, commercial real estate and regional banking sectors continue to show pockets of weakness that could spill into the broader economy if not contained.

Still, the firm’s new outlook aligns with a growing consensus on Wall Street: that the Fed may achieve the rare feat of a soft landing—taming inflation without tipping the economy into recession.

Market Implications

Markets responded positively to Goldman’s revised forecast. Equities extended their rally, with the S&P 500 notching fresh highs amid renewed investor confidence. Bond yields ticked lower on expectations of a less aggressive Fed, and risk assets broadly gained across sectors.

“The narrative has shifted,” said Lindsey Phillips, a senior strategist at Barclays. “We’re moving from recession fears to growth stabilization, and that changes everything from asset allocation to policy expectations.”

The Bottom Line

Goldman Sachs’ recalibration on recession risk adds fuel to the growing belief that the U.S. economy may dodge a downturn in 2025. While challenges remain, the balance of risks has tilted more favorably—offering investors, businesses, and policymakers a more optimistic economic backdrop as the year unfolds.