Singing against the "theory of decline"! Goldman Sachs: The rise in US unemployment rate should not be overly worried about

The US unemployment rate is rising, triggering a common recession indicator - the "Dudley Rule", implying that the US economy may enter a recession in the next 6 months. Citigroup previously warned that the US stock market may experience a 5% pullback in the second half of the year.

However, Goldman Sachs has provided a different interpretation of the "recession theory" caused by the rising unemployment rate. The latest report from the institution pointed out that although the unemployment rate has increased, the market has no reason to be overly worried about it.

An analyst team led by Goldman Sachs' chief economist Jan Hatzius released a report last week stating:

Calculated on a three-month average, the current US unemployment rate is 0.46 percentage points higher than its cyclical low. In US history, even moderate increases in the unemployment rate have evolved into significant increases accompanying economic recessions.

But this time we are not too worried, mainly for three reasons.

The first key point is that the rise in the unemployment rate this time breaks the historical pattern. Goldman Sachs wrote:

We observe that the rise in the unemployment rate has not been accompanied by the common increase in layoff rates in history, which is crucial. It indicates that our economy has not fallen into a vicious cycle of reduced consumption due to unemployment and income loss, leading to more unemployment.

Goldman Sachs believes that part of the rise in the unemployment rate is due to an increase in labor supply, especially the influx of immigrants, while job growth has not fully kept pace with this influx. In addition, despite a weakening in labor demand, the Federal Reserve has enough room to cut interest rates, enabling it to take swift action when necessary to support economic growth.

In principle, an excessive decline in labor demand may only result in reduced hiring for unemployed workers and new entrants to the labor market, at least initially without a significant increase in layoffs. However, this situation may be a more gentle and slow-moving issue, which the Federal Reserve can effectively address, unlike the rapid vicious cycle of increasing layoffs.

According to a previous article by Wall Street CN, as recession fears spread, **some traders are betting that the Federal Reserve will make a one-time significant 50 basis point rate cut in September **Previously, the market has fully digested the forecast of at least two 25 basis point rate cuts by the Federal Reserve this year.

The report also points out that some temporary labor market frictions, such as the higher unemployment rate of new immigrants and labor reallocation caused by economic structural changes, may be one of the reasons for the rise in the unemployment rate. However, these frictions are considered temporary and are expected to gradually disappear over time.

With the slowdown in immigration, we estimate that the U.S. economy will only need to create approximately 150,000 jobs per month in the future to maintain the stability of the unemployment rate, which is in line with our forecast for the second half of the year. Therefore, our best guess is that the unemployment rate will roughly stabilize at the current level.

Looking ahead, Goldman Sachs expects that as these temporary factors fade, the labor market will return to full employment, with the range of structural unemployment rate between mid-3% to low-4%.