Making Sense of Weak Job Growth Alongside Solid GDP Growth

Is The US economy still on solid footing? This spring, the big question was whether a recession was ahead. Now the question seems to be, how has The US economy proven so resilient, and what does its continuing strength mean for the Federal Reserve? I'm Allison Nathan, and this is Goldman Sachs Exchanges. This week, I'm joined by David Miracle, our chief US economist in Goldman Sachs Research. David, welcome back to Exchanges.

Thanks, Allison. Great to be back.

David, it's been a little while since you've been with us, so why don't we start with you providing us a top line view of what's going on with The US economy right now? We've obviously been lacking a lot of the data we normally get because we have this ongoing government shutdown, but it seems like growth is holding up relatively well despite fears that we and I think many people had that tariffs would weigh on growth. So what explains that resilience?

Yeah. I think that's right. We came into the year, like most forecasters, expecting modest tariffs and 2% plus GDP growth. We found out in March and April that we were getting a lot more than we bargained for in the way of tariffs, and we and most forecasters lowered our growth forecast from, call it, the 2% plus neighborhood to the 1% neighborhood. Since then, we are, as you said, a few weeks out of date because of the government shutdown on what exactly is going on. We've missed a number of data releases. But based on what we knew before the shutdown, it looks like actually we're on track fo

But we are having an ongoing government shutdown, which I think is lasting longer than most people had anticipated originally. So what bearing is that having on growth?

Sure. So we're now up to about a three week shutdown. If you look at prediction markets, they're expecting this to take about another three weeks. The mechanical effects of the shutdown for the economic statistics are that for every week that goes by, just because of the contribution from government to GDP, which is measured by looking at how many hours government workers are working, we estimate that this subtracts about oneten of a percentage point from quarterly annualized GDP growth per week of shutdown. But then in the subsequent quarter, so Q1 of next year, you would get that oneten grow

Let me ask you about the labor market. Because at the same time that US growth, GDP growth has held up pretty well, it looks like the labor market has slowed pretty meaningfully. So how do you square that?

Sure. So that's right. The jobs numbers are certainly quite weak and a lot weaker than we've all gotten used to over the decade or so. Meanwhile, we think if you average the first few quarters of the year, GDP has probably grown at at least a 2% pace. Now the first thing to be said is in moderation, this combination of softer jobs numbers than we're used to, coupled with still solid GDP growth in the 2% neighborhood, this is just going to be something of a new normal because productivity growth, which is kind of the gap between GDP growth and hours worked growth or labor supply growth, that ha

So how worrying is that? How worried are you that we see a severe deterioration in the labor market that ultimately weighs on growth?