May’s surprisingly weak jobs report may have upset investors and stoked speculation of a Federal Reserve interest rate cut — but it’s not time to panic just yet, according to Goldman Sachs (GS).
With Wall Street already unnerved by the prospect of a trade war with Mexico and China, investors are betting on the Fed responding with a new rate-cutting cycle that could begin as early as July.
Yet for various reasons, Goldman Sachs said on Monday that all is not lost for the formerly torrid jobs market. Economist Jan Hatzius listed four reasons why markets shouldn’t panic about a soft employment market.
The data “raise the question whether the job market is starting to falter amid slower output growth and a significant increase in tariff-related uncertainty following the collapse of US-China trade talks last month,” wrote Hatzius.
Goldman’s “own analysis also suggests a potentially meaningful impact,” the economist said.
Job growth is still looking healthy
Meanwhile, the economy’s job creation is still robust. The three and six month average of growth is at 150,000-175,000, which is “well above the break even pace around 100k,” Hatzius said.
“Beyond the short-term fluctuations, we expect the underlying trend of job growth to slow gently toward the breakeven pace, with some further declines in the unemployment rate over the next year,” he added.
Other labor markets are painting a brighter picture
Goldman pointed out the U-3 (official) unemployment rate remains at 3.6%— the lowest it’s been in 50 years. Meanwhile, the U-6 (which includes part-time workers) fell to 7.1%, with jobless claims also low.
For those reasons, Hatzius said that other labor market indicators are showing a much brighter picture.
“This assumes that the trade war will remain a source of uncertainty, but will not spiral out of control with sharply tighter financial conditions and large spillovers to business behavior,” Hatzius wrote.
“In that regard, Friday’s agreement between the US and Mexico represents a step in the right direction,” he continued, adding that it may also help ease trade tensions with China and Europe.
Sentiment still solid
Hatzius also conveyed that surveys that gauge business and consumer sentiment still appear “reasonably solid.”
Confidence indexes like those University of Michigan and the Conference Board still indicate consumers intend to keep spending, despite the uncertainty, which is helping to prop up the economy.
“Both business and consumer surveys—whose timeliness makes them particularly valuable following major policy news—still look reasonably solid, especially when adjusted for the inventory adjustment that continues to weigh on the manufacturing sector,” he added.
Donovan Russo is a writer for Yahoo Finance. Follow him @Donovanxrusso.