Strong Job Market Keeping Economy Safe For Now, Goldman Says

In a morning note to clients, Goldman acknowledged a barrage of recently weak economic data—on consumer spending, manufacturing and international trade—has pushed some forecasts for second-quarter gross domestic product growth into negative territory, but called the projections “too pessimistic”.

After the U.S. economy unexpectedly shrank in the first quarter, a decline in the second quarter would constitute a technical recession, or two consecutive quarters of negative GDP growth, but the economists note they still believe the odds of a recession over the next year are only about 30%, and 50% over the next two years.

The team says it’s “doubtful” the National Bureau of Economic Research—whose declarations of recession are accepted by the government but don’t strictly follow the two-quarter rule—will say the economy is already in a recession given how strong the labor market remains, citing Friday data showing the U.S. gained a better-than-expected 372,000 jobs last month.

It would be “historically unusual” for the labor market to appear so strong during a recession, the Goldman team led by Jan Hatzius writes, noting that jobs have grown at an annualized pace of 3.7% over the last six months—roughly double the typical pace at the start of past recessions.

Despite remaining bullish, the team concedes labor market data typically lags other economic indicators and cautions that revisions to recent data could ultimately reveal that job growth may have been less robust, as was the case at the onset of the Great Recession.

In a separate note on Monday, Hatzius said the strong jobs report helped quell fears of an imminent recession, but also contained red flags: He notes the Census Bureau’s survey of 60,000 households has shown “essentially no job gains” for the past three months—casting doubt on the overall jobs figure, which is based on a survey of companies.

The U.S. economy posted its worst showing since the Covid-induced recession in the first quarter, shrinking 1.6% despite expectations originally calling for 1% growth. The worse-than-expected decline makes a second straight quarterly decline in GDP “much more likely,” Pantheon Macro chief economist Ian Shepherdson said earlier this month, forecasting that GDP fell 0.5% in the second quarter. However, like Goldman, he believes the NBER “very probably will not” declare a recession unless the job market meaningfully slows down.

Rather than purely going off technical recessions, the NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” After losing more than 20 million jobs at the height of pandemic uncertainty in the spring of 2020, the labor market has quickly and forcefully led the economic recovery. However, prolonged inflation and rising interest rates, which tend to hurt company earnings, have sparked concerns about the broader economy and started taking their toll on the job market.

Recently booming technology and real estate companies have announced waves of layoffs this summer, and corporate giants including Amazon and Walmart have both signaled a slowdown in their hiring needs, with Walmart executives pointing to “overstaffing” as a drag on disappointing profits last quarter. “There is no doubt that a labor market slowdown is underway,” Hatzius said Monday, pointing to the layoffs and hiring freezes, in addition to a drop in job openings, rising jobless claims and data showing employment in the manufacturing and service industries has contracted.

The Bureau of Economic Analysis unveils its first estimate of second-quarter GDP growth—or decline—on July 28. It will then update the figure in August before releasing a final estimate in September.

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Even amid the Great Resignation, job demand skyrocketing, and shifting power dynamics between employers and employees that have led companies to enhance compensation packages and other perks, fears over job security still exist among a majority of workers. “Workers have experienced a tremendous amount of upheaval,” ADP Chief Economist Nela Richardson said during a recent CNBC Evolve Livestream. “The changes are both seismic and persistent.”

Richardson cited a recent ADP survey that found that only 20% of workers felt that their job was secure. That is just one byproduct of a new working landscape that is poised for further adjustment due to the looming threat of a recession and slower growth for companies, both tied to the fight against inflation.

Even as the economy has added over two million jobs this year, near 40-year high inflation is limiting the amount of money workers bring home and jeopardizing a full recovery for the economy from the Covid-19 crisis. “The real thing to focus on today is inflation,” Richardson said. “What inflation does is it erodes the value of that paycheck. … People are getting more take-home pay; it’s just not going as far as it used to.”

“Even though their wages have gone up and they’re growing faster, when all is said and done the average worker in the fourth quartile [of income earners] is only making about 2 bucks, a little less than 2 bucks [more] than they did in 2019 per hour,” Richardson said. “Despite all the talk of wage growth, it hasn’t been stellar when you think about inflation. Real wages are declining, and that’s true at every income level.”

U.S companies were expecting to pay an average 3.4% raise to workers in 2022, according to a January survey, outpacing the raises in both 2020 and 2021. While inflation was one reason given as to why, 74% of companies cited the tight labor market. Microsoft recently said it would be raising compensation. “This increased investment in our worldwide compensation reflects the ongoing commitment we have to providing a highly competitive experience for our employees,” a company spokesperson told CNBC.

To keep workers happy in an inflationary environment, organizations must also focus on boosting worker flexibility and security, Richardson said. ADP’s survey shows workers want flexibility over their time and more autonomy in their work. In spite of inflation, “our data shows that workers are willing to take pay cuts to get that kind of flexibility,” Richardson said.

This places even more importance on how companies are approaching bringing back workers to offices. Two-thirds of the U.S. workforce would consider changing jobs if they were required to return to the office full-time, according to ADP’s People at Work survey. This flexibility is also nuanced. “Having some flexibility about when you work is so much more important to the U.S. worker than flexibility about where you work,” Richardson said.

It could also aid a rebound for female workers. More than 1.4 million net jobs were lost among women since the pandemic began. Before the pandemic, women made up 46% of workers, but took on 53% of the losses, according to Richardson. To rebound from these losses, “flexibility could be the answer,” said Richardson. “It could be a way to accommodate the very real fact that women have a larger share of the family responsibilities.”

Richardson highlighted that the current labor shortage also encompasses skill sets. “We need to start training the workforce of tomorrow for the jobs that are needed, not today, but the jobs that will be needed tomorrow,” she said. Boosting skill sets will lead to increases in job security among workers. Despite the possibility of a recession, organizations must make changes and evolve now to deal with the problems they are facing today.

“Whenever the Fed is hiking, recession is always that shadow in the closet that may come out. There is always a probability of recession; that doesn’t necessarily mean that it should be a front-burner concern for companies who, recession or not, have to make hiring decisions,” she said.

By: Zachary DiRenzo

Source: No, We’re Not In A Recession Yet: Strong Job Market Keeping Economy Safe For Now, Goldman Says

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