Goldman: Guess What, You're About To Get Hired Again

jobs unemployment

Goldman Sachs issued a report this week called “The labour Market: Crawling Out Of A Deep Hole.”

It chronicles the plight of the US labour market and how unemployment is truly affecting the US. Job growth is weak, but after months (and years) of economic downturn, Goldman believes that we could be on the cusp of a rebound in both the economic and labour markets.

The report presents both sides of the story. There are indeed many reasons to be optimistic about recovery and lower unemployment rates. But we are also reminded that this will not be easy and there are many challenges ahead of us and will be for quite some time.

See why they’re hopeful >

Layoffs have fallen sharply.

'From a peak of nearly 660,000 in March 2009, the four-week average of new jobless claims has fallen by roughly one-third. (The higher level of claims in mid- to late January seems to have resulted from processing delays earlier in the month; survey data also point to a declining layoff rate.) In fact, since the putative end of the recession in mid-2009, new claims have fallen more quickly than usual in the early recovery phase of a business expansion.'

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

The number of jobless appears to be stabilizing.

Since mid-2009, the number of people on unemployment benefits has declined. Unfortunately, this isn't due to strength in the labour markets - it's because unemployment benefits run out after 26 weeks traditionally.

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

Net job losses have ebbed.

'Stepping back from the short-term volatility, three-month averages of both the payroll survey of employers (+30,000) and household survey of individuals (-35,000) both suggest employment levels are roughly stable.'

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

Leading sectors are posting solid increases and more people are getting more hours at work.

'Areas of the economy that tend to see payroll gains first-- particularly temporary employment--have shown impressive gains. Total hours worked also have increased in two of the past three months.'

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

A lower unemployment rate...for now.

'A surprising drop to 9.7% in January marks a notable improvement from the 10.1% seen last October and raises the possibility that the unemployment rate may have peaked (although we still expect that it will drift higher later in 2010 and peak at around 101⁄2% early next year).Source: Conference Board. Department of labour.'

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

A surge in job advertising means companies are eager to fill vacancies.

'Although the number of job openings was essentially flat through the second half of 2009, online advertisements for employment have increased more than 20% on a seasonally adjusted basis over the past three months.

Taken together, these labour market indicators point to net job gains very soon in the payroll survey as well as the household survey. Recent severe winter weather across much of the country could conceivably delay that improvement until March. In the spring, federal hiring of temporary Census workers will boost employment numbers substantially, though only for a few months.'

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

It may seem obvious but economic growth = job growth

Goldman likes to remind us that without real GDP growth, you might as well forget about unemployment or job growth making headway.

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

Of course, if unemployment does remain high, we're in for some dire consequences.

Don't say we didn't warn you.

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

Wage and income growth will get killed.

'Wages and salaries represent just over half of total personal income. Leaving aside the direct effect of growth in employment or hours, wages per hour are determined by essentially two factors: the recent rate of inflation and the unemployment rate. Unemployment rates above 7% have typically been associated with real wage declines, suggesting very weak labour income growth for some years to come. Indeed, average hourly earnings are up only 2% in nominal terms, and down slightly in real terms, over the past year. And with price pressures quite limited, compensation for inflation is unlikely to contribute much to wage growth in the near term.

Putting together the demographic and purely cyclical factors, we suspect the labour force participation rate will stabilise in coming months and perhaps even increase slightly. A stable participation rate would imply that net job gains of just over 100,000 per month are needed to keep the unemployment rate.'

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

Deflation.

Influence on government economic policy. Here come bigger deficits.

Goldman sums this up quite nicely:

'High unemployment and low wage growth have traditionally been a toxic mix for incumbents.'

Expect deficits to increase over the next few years if things get worse.

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

Expect slow recovery in 2010

'We reckon that fiscal stimulus (including its multiplier effects) and inventory stabilisation accounted for all of the 4% average annual growth reported for the second half of 2009; by the second half of 2010 these supports will have dissipated.

Meanwhile, the US economy faces several structural headwinds. Among them: (a) efforts by households to boost saving out of current income, aggravated by (b) weakness in labour income, reflecting the impact of high unemployment on wages and employers' reluctance to rehire aggressively, (c) fiscal drag from the state and local sector, (d) large overhangs of vacant homes and unused industrial capacity, which limit the potential for major improvements in private-sector investment, and (e) limited credit availability from a financial sector that is still on the mend. As a result, we expect growth to slow gradually to an annual rate of 11⁄2% in the second half of 2010 before reaccelerating in 2011.'

Source: Goldman Sachs: The labour Market: Crawling Out Of A Deep Hole

But either way, unemployment is likely to drift higher.

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