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Goldman Sachs says US job growth has been running too hot

Wednesday, March 25, 2015 - 06:52
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One of the big debates among economists now is whether the economy will catch up with the booming US jobs machine.

[NEW YORK] One of the big debates among economists now is whether the economy will catch up with the booming US jobs machine.

The year so far has been characterised by downside surprises across a wide array of economic indicators. Retail sales slumped in February and factory output fell for a third consecutive month. Continued strength in the labor market has been one of the only positive outliers.

Now, Goldman Sachs Group is weighing in. Job growth will have to slow going forward to catch down to the rest of the data, according to David Mericle, a Goldman Sachs economist, who says the pace of employment gains has "been running 'too hot' recently" relative to overall economic growth.

Labour market indicators are the only ones outperforming economists' expectations this year, according to data compiled by Bloomberg.  "Our model suggests that the recent 275-300k rate of monthly payroll gains is likely to be as good as it gets," Mr Mericle wrote in a note to clients. "Under our baseline forecast for 3 per cent real GDP growth this year and next, we expect a gradual deceleration to a roughly 200k rate. The risks to both the GDP and employment numbers in 2016 are a bit to the downside." Goldman projects job growth will slow going forward.

Outsize payroll growth in recent months has helped generate a swift decline in the unemployment rate. In February, it was 5.5 per cent, down from 6.7 per cent a year earlier.

The speed of the drop has taken Federal Reserve policy makers by surprise, and it prompted them to lower their year-end forecasts for the unemployment rate at the Federal Open Market Committee's March meeting. The central tendency of those projections, which excludes the top and bottom three of the 17 committee members' forecasts, fell to 5 per cent to 5.2 per cent from 5.2-5.3 percent in December, when the previous set of projections were published.

That 5-5.2 percent range matches the central tendency of what Fed officials deem to be "full employment."  Fed officials would say lower rates of unemployment would start to spur an acceleration in consumer price increases.

Fed policy makers also marked down their projections for GDP growth at the March FOMC meeting, showing they aren't as optimistic about the U.S. economy as the Goldman Sachs economists.

The central tendency of officials' 2015 forecasts projects GDP growth of 2.3 per cent to 2.7 per cent this year, down from the previous 2.6-3 per cent range. Notably, their 2016 and 2017 forecasts dropped as well.

Fed officials reduced their forecasts for growth, unemployment, and inflation at their March meeting.

The subdued outlook for growth and employment may explain why Fed officials expect a slower pace of interest-rate increases once they begin tightening than they previously envisioned. In March, the median FOMC member projected the central bank's benchmark federal funds rate would be 1.75 per cent to 2 per cent by the end of 2016. In December, that number was 2.5 per cent.

Trading in fed funds futures suggests the Fed is likely to begin raising the rate from zero, where it has been held since 2008, in September. The downward shift in the Fed's rate forecasts "strengthens our confidence that liftoff is considerably more likely in September than in June," Goldman Sachs Chief Economist Jan Hatzius wrote in a note to clients last week after the meeting. "While a September hike remains our baseline, the risks now appear skewed toward a later liftoff."

BLOOMBERG