The July employment report revealed significant weakness, with modest gains in both payroll and household employment and a 0.2 percentage point increase in the unemployment rate to 4.3%.
However, Goldman Sachs economists cautioned against viewing the July jobs numbers as indicative of a new trend.
“We had expected some technical weakness in payroll growth from the calendar configuration and the impact might have been worse than we expected, and while the Bureau of Labor Statistics said that Hurricane Beryl had ‘no discernible effect,’ there were signs that temporary factors weighed on the labor market,” they said in a note.
The economists emphasized that inferring too much from a single jobs report is generally a mistake unless there is a major shock that changes the overall picture abruptly. They maintained their estimate of underlying trend job growth at around 150,000, which is still in line with their go-forward breakeven rate estimate, though at risk of falling below it.
They also pointed out several reasons why the rise in the unemployment rate, while concerning, might be less dangerous than past increases.
Over 70% of the increase in July was due to temporary layoffs, which could reverse and are not reliable recession indicators. Moreover, the low rate of permanent layoffs reduces the risk of a rapid downward spiral of income loss and reduced spending. Economists also noted that some of the increase, including in July, was due to temporary labor market frictions, such as job-finding challenges for new immigrants.
The Wall Street firm remains skeptical that the labor market is at risk of rapid deterioration, citing strong job openings, continued healthy final demand growth, and the absence of a significant negative shock. While some companies report pessimistic views on consumer spending, these concerns are outweighed by the overall positive trend in corporate revenues and positive surprises in consensus forecasts.
Against the current backdrop, Goldman economists have raised their 12-month recession odds by 10 percentage points to 25%, however, they “continue to see recession risk as limited,” the note states.
This is largely because economists view the current data as positive overall and do not see significant major financial imbalances. Moreover, the Federal Reserve Chair Powell said last week that the central bank has 525bp of room to slash the funds “and would surely be quick to support the economy if necessary,” economists highlighted.
To account for the weak employment report, Goldman Sachs adjusted their Fed forecast to include three consecutive 25bp rate cuts in September, November, and December, instead of quarterly cuts.
“The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks. If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September,” economists explained.
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