Goldman Sachs lowers the probability of a U.S. recession to 20% following the release of retail and employment data.

• Goldman Sachs recently lowered its probability forecast for a U.S. recession from 25% to 20%, following a previous increase from 15%.
• Goldman economists, along with others in the industry, were alarmed by the July jobs report's weaker-than-anticipated results, which had kept the odds at 15% for nearly a year.
• Since then, retail sales and jobless claims have alleviated concerns that the world's largest economy is facing a recession or is already in one.

After raising its probability forecast for a U.S. recession, the company cut its forecast to 20% due to new labor market data.

Goldman's economists increased their 12-month U.S. recession probability from 15% to 25% after the July jobs report in August, which showed nonfarm payrolls grew by 114,000, lower than the 179,000 of June and below the Dow Jones estimate of 185,000.

The report about the world's largest economy caused widespread concerns and led to a brief but sharp stock market sell-off at the beginning of the month.

The Sahm rule has been triggered, indicating that the initial phase of a recession has begun as the three-month moving average of the U.S. unemployment rate is at least half a percentage point higher than the 12-month low.

Goldman initially attributed the probability of an economic downturn to a specific reason, but later changed its stance on Saturday. It now believes the odds are down to 20% because data released since August 2 showed "no sign of a recession."

Despite expectations, retail sales for July increased by 1%, while weekly unemployment benefit claims were lower than anticipated.

Last week, a rally in global stocks occurred due to a change in mood prompted by the figures.

Goldman economists stated on Saturday that if the US continues to expand, it will resemble other G10 economies, where the Sahm rule has not been adhered to more than 70% of the time. They pointed out that several smaller economies, including Canada, have experienced significant increases in unemployment rates during the current cycle without entering a recession.

According to Claudia Sahm, the chief economist at New Century Advisors and the inventor of the rule, the U.S. is not currently in a recession, but a further weakening in the labor market could push it into one.

A healthy jobs report on Sept. 6 may prompt Goldman to lower its recession probability from 15% to 10%, according to the bank's economists.

If no other negative surprise occurs in the jobs report, Goldman will become more confident in its forecast for a 25-basis-point rate cut at the Federal Reserve's September meeting, rather than a steeper 50-basis-point trim, they added.

The Fed rate cut in September has been fully priced in by markets, but the probability of a 50-basis-point reduction has been reduced to 28.5%, according to CME's FedWatch tool.

Al Dhabi Capital's senior portfolio manager, Rashmi Garg, stated on CNBC's "Capital Connection" on Monday that she anticipates a 25 basis point reduction unless there is a significant worsening of the labor market in the upcoming September 6 jobs report.

— CNBC's Sam Meredith contributed to this story.