Did the Federal Reserve make another mistake? Goldman Sachs: The job market is not optimistic

The Federal Reserve's "hawkish" interest rate cut has been criticized.

Recently, Goldman Sachs analysts released a report stating that the latest data from the labor market is not optimistic, with a record drop in employment rates suggesting a surge in unemployment rates and an impending economic recession. Goldman Sachs believes that "Powell made a big mistake."

Just three months ago, the Federal Reserve had significantly cut interest rates by 50 basis points to "combat the economic recession," but now it has suddenly shifted from "angry doves" to "militant hawks." Goldman Sachs foreign exchange strategist Steve Englander questioned:

"If you are going to be so hawkish, then why did you cut rates in the first place?"

Goldman Sachs believes that the Federal Reserve made a disastrous policy decision and incorrectly chose the timing of its hawkish shift, as "objective third-party labor market tracking data shows signs of a collapse in the labor market."

Goldman Sachs economist Manuel Abecasis pointed out that since September, the proportion of unemployed workers finding jobs within a month has decreased by 7% to 21%, marking the largest two-month decline on record and the lowest level since 2014. The sharp decline in this employment rate may raise concerns about a significant rise in the unemployment rate.

Goldman Sachs attempted to explain this recession signal by proposing three possible factors:

First, the employment rate of foreign workers has significantly decreased, dropping by about 10% in recent months, accounting for about 2 percentage points of the total decline in employment rates. The immigration policies that the Trump 2.0 administration may implement could make employers less willing to hire these workers.

Second, the employment rate of trade and transportation workers has decreased by about 10%, accounting for another 2% of the total decline in employment rates, partly due to seasonal fluctuations brought by the Thanksgiving holiday in November, which reduced job positions by 28,000.

Third, the increase in retirements among unemployed workers aged 65 and older in November has led to a significant decline in the employment rate for this age group, dropping about 15% from September levels and 13% below the average level in 2019, which accounts for 1% of the total decline in employment rates.

However, although these three factors can explain the 5% decline in employment rates since September, the latest data from the Philadelphia Federal Reserve Bank shows that the increase rate of job positions in the second quarter is negative, with a significant downward revision of the previously reported 1.1% growth.

Goldman Sachs stated that the steady decline in employment rates over the past year is consistent with a significantly relaxed and "not yet stabilized" labor market in 2024, which may indicate the approach of a labor market recession, or it may have already arrived.