This is the worst the jobs market has looked (outside of a recession) in 50 years, says Goldman Sachs, meaning bullish GDP estimates are too optimistic

Goldman Sachs' Chief Economist Jan Hatzius warns that optimistic U.S. Q2 and Q3 GDP estimates, tracking as high as 3.8% and 3.3% respectively, are likely overstated due to missing data from the government shutdown and significant weakening in labor market indicators. Hatzius points to employment surveys falling below 50, a labor market tightness tracker at 2016 levels, and historically negative household surveys on unemployment, suggesting stagnation or contraction. He also attributes some GDP strength to temporary tariff-driven stockpiling and notes growing hiring challenges for younger workers partly due to AI, concluding that job market weakness provides a more reliable signal that underlying growth is accelerating only gradually.

Analysis

Goldman Sachs' Chief Economist Jan Hatzius warns that optimistic U.S. Q2 and Q3 GDP estimates, tracking at 3.8% and 3.3% respectively, are likely overstated. This assessment is primarily driven by significant weakening in labor market indicators, including employment surveys falling below 50 and Goldman's labor market tightness tracker easing to 2016 levels, suggesting stagnation or contraction. Furthermore, household surveys on unemployment expectations are at historically negative levels outside recessionary periods.

Hatzius attributes some of the perceived GDP strength to temporary factors, such as tariff-driven stockpiling earlier in the year, which distorted durable goods purchases and inventory data. He notes that survey measures for manufacturing and services, less affected by such front-loading, remain around 50, consistent with stagnation or very slow growth. This reinforces the view that underlying economic growth is accelerating only gradually.

Compounding the labor market concerns, Hatzius highlights growing hiring challenges for younger workers, partly due to the increasing adoption of artificial intelligence. He suggests that increased AI penetration could further decline labor demand, particularly in 'routine cognitive' occupations, if underlying growth remains muted or weakens.

Key Decisions for Investors

• Investors should re-evaluate current U.S. GDP growth projections, acknowledging Goldman Sachs' warning of potential overstatement due to weakening labor markets and temporary tariff-driven boosts.
• Closely monitor labor market indicators, such as employment surveys and the labor market tightness tracker, as these may offer a more reliable signal of underlying economic health than preliminary GDP estimates.
• Assess portfolio exposure to sectors vulnerable to AI-driven labor displacement, particularly for roles typically filled by younger workers, as this trend could impact future demand and economic stability.