In a surprising turn of events, Jan Hatzius, the chief economist at Goldman Sachs, has revised downwards the probability of a US recession over the next year. Hatzius now estimates the chances of a recession at 20%, down from the previously estimated 25%. This adjustment comes just over two weeks after he raised the recession probability following a disappointing jobs report in July. The move sparked concerns across global markets, but recent data has painted a more positive picture for the US economy.

According to Hatzius, improved economic indicators and a strong corporate earnings season justify the lowered recession risk. He stated, "The economy is still doing fine," during an interview with Yahoo Finance's Catalysts. Hatzius also cited the downgrade as a reason to expect the Federal Reserve to make a smaller interest rate cut of 25 basis points in their upcoming September meeting. Previously, a more severe 50 basis points cut seemed probable in light of recession fears.

The latest ISM services report, which measures business activity, new orders, employment, and supplier deliveries, revealed a positive reading of 51.4% in August, up from 48.8% in June. Figures above 50% indicate economic growth, and most companies surveyed reported either steady or gradual expansion. Furthermore, the number of new applications for unemployment benefits in the US dropped to a one-month low last week, continuing a trend of diminishing claims.

Additional encouraging data comes from the Commerce Department's report that retail sales saw a significant boost in July, with a 1% increase, the largest since January 2023. Online shopping played a pivotal role in driving these gains, compensating for a modest 0.2% sales decrease in June. Walmart's CFO, John David Rainey, echoed this positive sentiment, affirming that the consumer outlook remains resilient and that the back-to-school shopping season is off to a promising start.

The corporate earnings season has also exceeded expectations, with many well-known public companies surpassing both sales and profit forecasts. This string of positive results, in conjunction with proactive rate cuts by the Federal Reserve, has started to restore confidence in the markets. Analysts suggest that this combination could lead to a shift in the market narrative from a soft landing to a Goldilocks scenario, where economic growth is steady and inflation remains low.

Looking ahead, Wall Street is cautiously suggesting to clients to return to less volatile investments. Market momentum from the past weeks may continue through the fall, with a potential reversal expected at a later date. UBS Global Wealth Management's Jason Draho highlighted the significance of strong growth data in the August payrolls report and the proactive actions taken by the Fed.

As the US economy shows signs of resilience and improvement, Jan Hatzius' revised recession outlook aligns with recent positive economic indicators and corporate results. Despite global economic challenges, the US remains a bright spot, providing hope for investors and businesses alike.

Brian Sozzi is the Executive Editor of Yahoo Finance. For tips on deals, mergers, activist situations, or any other queries, email brian.sozzi@yahoofinance.com.

Please note that this news article is based on information provided by Yahoo Finance and does not constitute financial advice.