Goldman Sachs warns that a stagnant labor market could weigh on upbeat GDP numbers

In a note, see it luck, Jan Hatzius, chief economist at Goldman Sachs, confirmed that GDP estimates rose sharply during the government shutdown period, with the growth rate in the second quarter reaching 3.8% and the third quarter at 3.3%. According to some estimates, this number is even higher: for example, the Federal Reserve Bank of Atlanta. Written on October 17 Updated that Q3 GDP could reach 3.9%.

Although the stock market has been steadily rising, the Federal Reserve is expected to cut interest rates at least once more before the end of the year. Although the growth trajectory looks positive, Wall Street has every reason to celebrate, right?

Not quite, according to Hatsios. He warns that employment may be a thorn in the side of a rosy outlook, along with changing business behavior in reaction to the policy shift from the White House.

On the employment side, Hatzius noted that job expectations in surveys, such as growth in manufacturing and services, have fallen “well below (the midpoint of the index) 50, consistent with stagnant employment or even contraction.” As a result, the Goldman Labor Market Tightness Index (which averages data including the estimated unemployment rate, estimated job openings, the Conference Board labor market spread, and the New York Fed’s job outcome outlook, to name a few), has fallen to 2016 levels and continues to trend downward.

“Household polls are already very negative,” Hatzius points out. “For example, the expected change in the unemployment rate over the next year has not been this bad outside of recessions since the University of Michigan started asking that question in 1978.”

As such, Hatzius adds: “Given that labor market indicators often provide more reliable information about current growth than preliminary GDP estimates, this weakness increases our conviction that Q2/Q3 GDP is sending a very positive signal.”

One of the factors exacerbating this optimism is the distortion in growth figures due to business sentiment in the earlier parts of this year. This is due to “front-loading of durable goods purchases plus fluctuations in inventories and net trade,” Hatzius explains.

This behavior was of course driven by the tariff plans announced by President Trump earlier this year. As threats between America and its trading partners escalate, companies have begun front-loading their orders in an attempt to stock inventory at cheaper prices.

As the Fed notedThis shift was particularly focused in March when U.S. import volumes from several major trading partners — most notably the eurozone and Taiwan — rose by 75 basis points compared to the end of 2024.

Outside of these durable goods, Hatzius adds, “survey measures for both manufacturing and services growth – which are less affected by the initial move – remain at around 50, which is consistent with stagnation or very slow growth. While lower drag from higher tariffs, impending tax cuts, and easier fiscal conditions have improved the outlook, we feel “We are encouraged by our view that fundamental growth is only gradually accelerating.”

Problems faced by those entering the labor market

Hatzius also echoed the concerns of other prominent economists regarding the job prospects of younger individuals in particular. “It’s becoming harder to hire people entering the workforce,” Federal Reserve Chairman Jerome Powell said earlier this year. However, Powell warned that if talent possesses the technical skills, they are more likely to get roles and even perform “brilliantly”, and added: “If you don’t have these skills, you will have increasingly less attractive employment options.”

Goldman Sachs’s chief economist reached the same end result, that young people are struggling to get jobs, but said part of this is due to the rise of artificial intelligence.

“while Job growth pattern “It does not yet show a strong association with AI exposure at the industry level,” Hatzius noted. “Job opportunities for younger workers in technical occupations have weakened, and many management teams jointly mention AI and work in earnings calls. Let’s assume that underlying growth remains weak or weakens again. In this case, history suggests that labor demand – especially in ‘routine cognitive’ occupations” But perhaps also more broadly – likely to decline further as AI becomes more widespread.