Goodbye, Recession Fears! Strong Jobs Report Slows Crash Warnings.

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  • In response to Friday’s stunning jobs report, Goldman Sachs has lowered the country’s odds of hitting a recession this year from 35% to 25%.
  • The country added 517,000 nonfarm payrolls in January, almost triple many analysts’ estimates.
  • Despite this, not everyone is so happy about the state of unemployment, namely, the Federal Reserve.
recession - Goodbye, Recession Fears! Strong Jobs Report Slows Crash Warnings.

Recession fears may be overblown, according to Goldman Sachs. Indeed, according to the bank’s latest research note, the odds of a U.S. recession have fallen to just 25%, a notable drop from its previous 35% estimation. What’s behind Goldman’s change of heart?

Well, in the face of one of the strongest jobs reports in recent memory, it’s no surprise to see some economists begin to backtrack from their pedestals of pessimism. Indeed the January jobs report came back nearly three times stronger than most analysts predicted, adding some validity to the long-fabled “soft landing” the Federal Reserve has attempted to engineer.

Recession Fears Fading

“We have cut our subjective probability that the US economy will enter a recession in the next 12 months from 35% to 25%,” said Goldman Sachs strategists. “Continued strength in the labor market and early signs of improvement in the business surveys suggest that the risk of a near-term slump has diminished notably,”

The U.S. economy added a whopping 517,000 nonfarm payrolls in January, crushing analysts’ estimates of 187,000. The 3.4% unemployment represents the lowest level since May 1969.

Now, by all accounts, this is strange. When monetary conditions tighten, unemployment is one of the fundamental sacrifices. As higher interest rates push the aggregate U.S. demand lower, layoffs are practically a certainty across many industries. Even recently, some of the biggest tech companies in the world have been forced to cut some of their staff in order to reign in costs in the face of slowing demand.

Reasonably so, unlike unemployment, consumer spending has started to ebb, with December showing a -0.2% annual drop in personal consumption expenditures. To see unemployment lag behind the greater economy to such a degree is both strange, promising, and concerning, depending on how you look at it.

Promising Jobs Report Adds Anxiety Over Rate-Hikes to Come

While Goldman read the January jobs report as a positive sign the economy may yet avoid recession, there is still a reason to be cautious over record-low unemployment: the Fed. Stocks shuttered the day the jobs report came out because analysts uniformly understood that strong unemployment, would likely persuade the Fed to hike rates more aggressively.

Many analysts have predicted the central bank would soon take a “dovish pivot,” opting to lower rates to soften an impending recession. At this point, that estimation is likely far too early, if not downright wrong. Now, analysts are speculating if the Fed will go beyond their expected 5%-5.25% terminal benchmark rate in the face of such stubborn unemployment.

In a question-and-answer session at the Economic Club of Washington on Monday, Fed Chair Jerome Powell attempted to offer insight into the Fed’s path forward without explicitly commenting on the impact of January’s jobs data.

“It is good that we have seen a very strong labor market … At the same time, we’re seeing wages moderating … Inflation is starting to come down,” Powell continued. “But it will do what it will do. Our job is to get inflation down to 2%,”

In that regard, Powell estimates the country can achieve the long-sought 2% inflation rate by 2024.

Rick Meckler, partner at Cherry Lane Investments, believes Powell’s comments reflect a sort of frustration with the lack of inlays being made in the battle against inflation.

“He seems to reiterate that fact that in his view inflation is cresting. And that’s been the biggest fear for participants in the market that with all the rate increases that in the Fed’s view no real progress is being made against inflation…He’s saying ‘no, it’s having its effect.'”

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


Article printed from InvestorPlace Media, https://investorplace.com/2023/02/goodbye-recession-fears-strong-jobs-report-slows-crash-warnings/.

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