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RECESSION RISKS RECEDE, BUT SO DO GDP ESTIMATES - GS

The 3-1/2-month war between the United States and Iran is inching toward a resolution, with negotiations in Switzerland over the weekend having laid "a good foundation" for a final agreement, according to U.S. Vice President JD Vance.

With market-rattling tensions in the Middle East going from boil to simmer, Goldman Sachs has cut its 12-month U.S. recession probability from 25% to a long-term norm of 15%.

"This is below our 20% estimate on the eve of the war because the labor market improvement since then indicates greater underlying resilience," writes Jan Hatzius, chief economist at Goldman.

Additionally, GS has "nudged up" its GDP forecasts for the second half of 2026 to 2%.

"The slightly stronger path reflects a positive sequential impulse to real income from lower gas prices, at a time when the economy continues to benefit from the AI boom via higher equity wealth as well as strong capex," Hatzius adds.

But as AI capex "largely consists of goods that are imported from Asia," and with real income defined on a cash flow basis forecast to slow in the back half of the year, Goldman believes consumer spending growth (the tentpole of the U.S. economy) will slow to a fairly tepid 1.5%, according to the note.

What's more, the brokerage expects a slowdown in payroll gains.

Highlighting a failure of other labor market indicators to confirm the recent outsized spike in payrolls, including the fact that household employment has been lagging far behind payrolls, and a loosening in labor market utilization indicators, "we expect wage and unit labor cost growth to remain muted despite the earlier increase in headline inflation," the note says.

(Stephen Culp)

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