Goldman Sachs sees 3 threats to a strong labor market
- The labor market may be returning to pre-pandemic conditions, Goldman Sachs found.
- Still, hiring rates are down and unemployment levels are expected to rise slightly.
The labor market looks like it's on its way to resembling that of pre-pandemic years — though returning to normal may come with several concerning developments.
An analysis released Monday by Goldman Sachs economists shows that the labor market's performance is "generally encouraging." However, three alarming statistics could indicate some difficulties over the next year: hiring is slowing, fewer Americans say they have jobs, and the service sector is reporting a much weaker labor market than last year.
"Broadly speaking, our analysis indicates a labor market returning to pre-pandemic norms, best characterized as a somewhat tight labor market that does not pose an inflation problem," the economists wrote.
Throughout the pandemic, Goldman Sachs held a rather optimistic view of the economy. GS sees no recession for 2024 and expects GDP growth to double consensus estimates — in line with their predictions from the last few years.
Recently, labor market data has been somewhat all over the place. Initial jobless claims fell to a 68-week low, though the Job Openings and Labor Turnover Survey (JOLTS) hiring rate has struggled compared to pre-pandemic levels. This implies that while layoffs are slowing, people aren't finding jobs as quickly, pointing to a growth in hiring freezes.
Additionally, the authors pointed out that while the Bureau of Labor Statistics' monthly survey of businesses shows payrolls still growing, the Bureau's household survey employment measure slightly declined in December and the ISM Services Employment Index is down significantly.
The Goldman economists expect that the Federal Reserve will begin to cut interest rates at the March meeting as hiring rates continue to fall, which could bring with it a bump in the unemployment rate.
GS analyzed layoff notices from the labor department's Worker Adjustment and Retraining Notification program and the subset of initial jobless claims reflecting layoffs in the current period. The monthly pace of layoffs has fallen about 10% since the middle of 2023, GS found, which could push the unemployment rate down slightly over the next few months.
Using data from JOLTS, Business Employment Dynamics, and Quarterly Workforce Indicators, GS found that the recent pace of hiring matches 2017 levels — and below 2018 and 2019 levels — though this data is released with a lag.
Though these findings may point to a recovering labor market reminiscent of pre-pandemic times, GS noted some headwinds.
The pace of gross hiring has slowed since the middle of 2022 and continues to fall. When looking at total hires compared to the year prior, the hiring rate has been in the negatives since August 2022 — and fell to -12.6% in November 2023.
This suggests that many companies are less equipped to hire more new employees, even as the economy added 216,000 jobs in December, particularly in leisure and government. Gains in jobs for the past few months have also been revised down — from 199,000 to 173,000 in November, and from 150,000 to 105,000 in October — which paints a slightly less rosy picture. GS predicts payrolls will grow roughly 100,000 per month in the second half of 2024.
GS also notes that job openings may decline in the first half of 2024 due to a decline in the hiring rate back to the levels of the mid-2010s. In November 2023, the hiring rate was 3.5%, down from highs of 4.6% in November 2021. GS estimates this could lead to a lower pace of hiring later this year.
GS also found that the labor market is at a higher risk of what it called "deterioration" in 2024 than in 2019. GS concluded that there is a nearly 20% chance that the unemployment rate could jump to between 4% and 5% within the next 12 months.
Though the market is set to normalize to pre-pandemic conditions, Americans may have a slightly harder time finding work or switching between jobs.