- A steady rise in the US unemployment rate is close to signaling a potential recession, according to a widely watched indicator.
- But Goldman Sachs notes the rise is less concerning due to a steady layoff rates and rising labor supply.
The US unemployment rate is up nearly 0.5% from its cycle low on a three-month moving average basis, which has historically been a reliable indicator that an economic recession is near.
This indicator, known as the Sahm Rule, could officially trigger by the end of this week if the July jobs report shows an increase in the unemployment rate when it is released Friday morning.
But even if the Sahm Rule does officially trigger, this time is different, according to Goldman Sachs.
In a note on Sunday, economists at Goldman Sachs offered three reasons why the steady climb in the unemployment rate over the past year is less worrisome than it has been in the past.
- The layoff rate is steady
Despite the steady grind higher in the unemployment rate, the layoff rate, which measures the number of job layoffs in the country, is still historically low.
"This is important because it means the economy is not experiencing the usual vicious circle in which job and income loss lead laid-off workers to reduce their spending, leading to further job loss," Goldman Sachs said.
The rise in the unemployment rate hasn't been predominantly driven by people losing their jobs, but rather by a surge in labor supply driven by immigration, according to the note.
"Job growth is far from weak, and with final demand still growing at a robust pace, it appears set to remain fairly solid," Goldman Sachs said.
- The Fed has plenty of ammunition
If the job market were to weaken in a significant way, the Federal Reserve could swiftly stimulate demand in the economy by cutting interest rates in a big way, especially as inflation gets closer to their long-term target of 2%.
"The Fed has 525bp of room to cut and no reason to hesitate anymore if it needs to push back," Goldman Sachs said.
- Temporary 'frictions' drive unemployment rate
According to the bank, some of the rise in the unemployment rate has been driven by "temporary labor market frictions."
"Most obviously, the recent immigrants themselves — whose unemployment rate in their first years in the US is unsurprisingly higher than that of other workers — have contributed 13bp of the 46bp increase," Goldman Sachs said.
Finally, changes in America's post-pandemic employment landscape, accounting for remote work and transitions away from downtown business centers, could also be a slight drag on the unemployment rate.
But as the economy and job market settles into its post-pandemic equilibrium, the unemployment rate should settle into a range of the mid-3s to the low-4s percentage rate, a level that has not always been associated with a recession, Goldman Sachs said.