Why recession fears are likely overblown

Alison: Global markets are selling off significantly as US recession fears come to the fore. Is this an overreaction, or have we reached an economic turning point? I'm Alpha Nathan, and this is Goldman Sachs Exchanges. Today, I'm speaking again with David Merkel, chief US economist for Goldman Sachs Research, about the outlook for the US economy, the risk of recession, and the Fed's path from here. David, welcome back to the program.

David: Thanks, Alison.

Alison: Let's start with Friday's jobs report because it obviously came in well below expectations, and it's really seemed to spook investors in the last couple of days. So what do you make of the report? And is this investor reaction overdone?

David: I think it was a weak report, but I do think that some of the fears were overdone. It was a weak report in the sense that job growth in both the establishment survey and the household survey was soft, too soft, I think, to keep up with labor supply growth, and the unemployment rate also rose 2 tenths. Now for a couple of reasons, though, I would not take the July report at face value as kind of a new statement of where we are. There were some signs that job growth was depressed by some temporary factors. The Bureau of Labor Statistics said that the hurricane barrel was not an issue for

But there was a big increase in the number of people not at work because of weather, and we also saw a very large increase in temporary layoffs. So whatever it was, something temporary seems to have weighed a little bit on job growth. This simpler point is that absent some big negative economic shock occurring very abruptly, you probably never wanna infer too much from just 1 month's data. And if you look at the recent trend, my take would be that we seem to be creating about a 150,000 jobs a month. Now that is roughly where we think trend growth of labor supply is going to be going forward be

So I'd say the place that we're at right now on job growth looks fine. It's just that over the last year, job growth has been trending lower, and we wouldn't want it to keep trending any lower. Similarly, on the unemployment rate, I wouldn't take the increase entirely at face value. 70% of the increase in the number of people unemployed in July came from temporary layoffs. And there are a number of reasons that I'm a little bit less worried about the roughly 6 tenths increase in the 3 month rate of unemployment than you might have been historically.

One of those is we're not really seeing permanent layoffs. And if you look across the job openings and labor turnover survey, initial jobless claims, warn notices, that's something that really holds up. In fact, the rate of permanent layoffs isn't just low. It's still about the lowest it's ever been in history. The importance of that is it reduces the risk of layoffs spiraling, of getting the sort of vicious circle of income loss leading to reduced spending, leading to more layoffs that would really threaten to move very quickly, perhaps more quickly than policymakers could handle.

We're just not saying that. The other reason that I worry a little bit less about the increase in the unemployment rate is that at least some of it seems to reflect temporary frictions in the labor market, most obviously just job finding challenges for recent immigrants themselves who unsurprisingly tend to be unemployed at a higher rate, and their share in the population has really increased. We think that's about 30% of the increase in the unemployment rate from the cycle low. And until those two trends kind of stop and until we see things stabil