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Contrary to the "recession theory"! Goldman Sachs: United States unemployment rate rises, there is no need to worry too much

The rise in unemployment in the United States has triggered a commonly used recession indicator, the "Dudley Rule," suggesting that the United States economy will fall into recession over the next six months. Citi previously warned that there could be a 5% pullback in U.S. stocks in the second half of the year.

However, Goldman Sachs has given a different interpretation of the "recession theory" caused by the rising unemployment rate, and the latest report of the agency pointed out that despite the rise in the unemployment rate, the market has no reason to worry too much about it.

A team of analysts led by Goldman Sachs Chief Economist Jan Hatzius released a report last week, saying:

On a three-month average, the United States unemployment rate is now 0.46 percentage points above its cyclical low. In United States history, even modest increases in unemployment have evolved into large increases accompanied by recessions.
Contrary to the "recession theory"! Goldman Sachs: United States unemployment rate rises, there is no need to worry too much
But this time we weren't too worried, and there were three main reasons.

First and foremost, the rise in the unemployment rate has broken the historical pattern. Goldman Sachs writes:

It is critical that we observe that the rise in unemployment has not been accompanied by an increase in layoffs that is common in history. It shows that our economy is not stuck in a vicious cycle of reduced consumption due to unemployment and loss of income, which in turn leads to more unemployment.
Contrary to the "recession theory"! Goldman Sachs: United States unemployment rate rises, there is no need to worry too much

Goldman Sachs believes that the rise in unemployment is partly due to the increase in labor supply, especially the influx of immigrants, and that job growth has not yet fully kept pace. Moreover, despite the weakening demand for labor, the Fed has ample room to cut rates and act quickly if necessary to support economic growth.

In principle, an excessive decline in labor demand may only manifest itself in a reduction in hiring of unemployed workers and new entrants to the labor market, at least initially, without a significant increase in layoffs. But such a scenario could be a more dovish and slow-moving problem that the Fed is able to respond to, unlike the rapid vicious circle of a downward spiral of layoffs.

According to a previous article by Wall Street, as recession fears spread, some traders are betting on a one-time massive 50 basis point rate cut by the Federal Reserve in September. Previously, the market had fully priced in the Fed's forecast of at least two 25 basis point rate cuts this year.

The report also notes that temporary labor market frictions, such as higher unemployment among newcomers and the redistribution of labor due to structural changes in the economy, may be contributing to the rise in unemployment. However, these frictions are considered temporary and are expected to fade over time.

As immigration begins to slow, we estimate that the United States economy will only need to create about 150,000 jobs per month to keep the unemployment rate stable, which is similar to our forecast for the second half of the year. Therefore, our best guess is that the unemployment rate will stabilize roughly at current levels.
Contrary to the "recession theory"! Goldman Sachs: United States unemployment rate rises, there is no need to worry too much

In its outlook for the future, Goldman Sachs expects the labor market to return to full employment as these temporary factors fade, with structural unemployment in the range of mid-3% to low-4%.

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