Goldman Sachs: Why you shouldn't worry about the rise in US unemployment rate?

The unemployment rate in the United States rose to 4.1% last month, with a three-month average increasing by 46 basis points from its low point in the cycle, slightly higher than the pre-pandemic average of 3.7% in 2019. The recent rise has raised concerns about the downside risks to the U.S. economy, as historically in the U.S., even a slight initial increase in the unemployment rate tends to eventually deteriorate significantly and lead to an economic recession. However, Goldman Sachs is not as worried this time, as they believe the recent increase in the unemployment rate is unusually mild. Goldman Sachs provides the following three reasons.

Firstly, the recent rise in the unemployment rate has broken a key historical pattern in one crucial aspect — the layoff rate has not increased and remains at historically low levels. This is important because it indicates that the economy has not experienced a vicious cycle where a decrease in the number of jobs and workers' income leads to reduced spending by laid-off workers, further resulting in more job cuts. The increase in the unemployment rate is partly due to a surge in labor supply driven by immigrants, while job growth has not fully caught up. However, job growth is far from weak, and final demand continues to grow at a robust pace, appearing to remain fairly solid.

With the slowdown in immigration, Goldman Sachs estimates that the U.S. economy will only need to create about 150,000 jobs per month to keep the unemployment rate stable, close to their forecast for the remainder of this year. Therefore, Goldman Sachs points out that the U.S. unemployment rate is expected to remain roughly stable at its current level.

Secondly, even if labor demand weakens excessively, the Federal Reserve has a full 525 basis points of interest rate cut space, and if necessary to address adverse situations, the Fed has no reason to hesitate. In principle, if labor demand weakens excessively, it may only manifest as reduced hiring of unemployed workers and job seekers entering the labor market, rather than immediately leading to significant layoffs or job cuts by businesses. Goldman Sachs believes that this situation could be a mild and slow-brewing issue that the Fed can effectively address.

Therefore, Goldman Sachs believes that even if the job market deteriorates, it should be a problem that can be better resolved, and relaxing monetary policy can effectively respond in a timely manner. Recent comments from Fed officials indicate that they will act promptly if necessary.

Thirdly, compared to the low point in the cycle and pre-pandemic levels, the slight increase in the unemployment rate seems to reflect temporary labor market frictions. Immigrants in the U.S. generally have higher unemployment rates in the first few years, and Goldman Sachs believes that 13 of the 46 basis points increase in the unemployment rate are due to immigrants. In addition, significant economic changes in recent years and the resulting redistribution of worker demand also seem to slightly raise the unemployment rate, as the economy is adapting to a new balance post-pandemic. These impacts may have been masked initially by strong labor demand, but now that labor demand has returned to a more normal level, the effects may be more apparent The unemployment rate rose by 46 basis points, with 13 basis points coming from immigrants.

What will maximizing future employment look like? Goldman Sachs believes that the frictions in the labor market are temporary, meaning that employment performance should largely resemble recent cycles. According to various calculations, Goldman Sachs believes that in a scenario of maximizing employment, the unemployment rate should be between the mid 3% to low 4% range. The Federal Reserve's FOMC expects the unemployment rate to rise to 4.2% this year, close to the top of Goldman Sachs' forecast range. This also means that a significant deterioration in the labor market from now on would be unwelcome by the Federal Reserve