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Goldman Sachs economist: ‘We’ll see a sharp slowdown’ in monthly hiring by end of 2022

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Goldman Sachs Chief U.S. Economist David Mericle sits down with Yahoo Finance Live’s Brian Sozzi at the Goldman Sachs 10,000 Small Businesses Summit in Washington, D.C., to discuss the outlook on the U.S. labor market and recession indicators.

Video Transcript

- Inflation, rate hikes, and market uncertainty are deepening recession fears. But Americans want to know, when will we see some relief? Well, Yahoo Finance's Brian Sozzi sat down with Goldman Sachs Chief US Economist David Mericle to talk about the state of the economy. Take a listen.

DAVID MERICLE: Sure. We're seeing the economy decelerate pretty sharply. We've already seen in the first half of the year a major slowdown in growth on the back of diminishing fiscal support and the increase in inflation further eroding household income. In the back half of the year, I think we'll start to see the signs of the Fed's monetary policy tightening slow the economy. And as final demand slows, companies' demand for workers should slow as well.

Now, at the moment, job openings are still extraordinarily high. So this is not going to happen overnight. It's going to take a little bit of time for weaker aggregate demand growth to translate to weaker demand for workers. But I think by Q3, by Q4, we will see a sharp slowdown in the monthly pace of hiring.

BRIAN SOZZI: So if I have this right, you're, in the back half of this year, looking for 150,000 jobs per month, right, on average?

DAVID MERICLE: On average.

BRIAN SOZZI: And then next year is 60,000 a month on average. Why that differential?

DAVID MERICLE: I think it's going to take a while because there is usually some momentum in hiring and because the current job openings rate is so elevated that there's clearly a lot of pent-up demand for workers at a lot of companies. So that even as the pace of growth decelerates, even as, you know, companies become a little bit less optimistic about the outlook, there are still a decent number of positions they're going to want to fill.

And so we think it'll be a gradual step down from hiring of about 350,000 to 400,000 jobs-- workers per month in the payroll survey in recent months to maybe 200,000 a month in Q3, dipping perhaps below 100,000 by Q4, and slowing a little further next year as the level of job openings comes down and companies moderate their hiring plans.

BRIAN SOZZI: Is it fair to say that layoffs increase inside of that framework?

DAVID MERICLE: Absolutely. I think the hard question is, how quickly will laid-off workers be able to find new jobs? We know that we need to reduce total labor demand substantially in order to get supply and demand in the labor market back in balance and calm wage growth and inflation. Now, it would be great if we could just push down job openings without pushing down employment, making more people unemployed and raising the risk that things snowball into a full-blown recession.

In practice, the hard question will be that as, inevitably, we get both some reductions in job openings and some declines in employment, will those unemployed people flow into remaining job openings as quickly as they normally do? One of the key features of the pandemic is that for whatever reason, available workers and available jobs have not been matching at the usual rate. And I think a very hard but important question now is, will that situation change?

If it does, then most of the reduction in labor demand would come from a harmless reduction in job openings. Our prospects for avoiding a recession would be much better. But if the shift out in the so-called Beveridge curve persists, if unemployed workers continue to have a harder-than-usual time finding those available jobs, then it means that as the Fed raises interest rates, as demand falls, as demand for workers falls, we're probably going to get-- in that scenario, we would get a good bit of both, a reduction in the openings rate and a more harmful increase in the unemployment rate.

BRIAN SOZZI: So if someone is laid off from their job over the next 12 months, how difficult will it be for them to find a job?

DAVID MERICLE: At the moment, workers say it is the easiest it's ever been in US history to find a job. Now, my guess would be that that situation changes pretty quickly as the economy slows, as job openings come down.

Job openings have already begun to come down over the last couple of months. These days, we don't have to wait around for the official JOLTS report from the government. We have a bunch of different high-frequency indicators from job openings websites. They show a decline in April and May and June. But the level is still very high. And I think it's going to be a while before job-finding prospects begin to deteriorate.

BRIAN SOZZI: As an economist-- and I want to get into your Fed work, too, as well because it's really enjoyable. What are some of the best real-time indicators someone should be watching when, in this environment, up seems down and vice versa?

DAVID MERICLE: Sure. So, you know, the big-picture problem is we need to get inflation under control. And certainly, there's, I think, a path there where an economy growing more slowly than it normally grows could allow supply to catch back up with demand, bring inflation down, not immediately, certainly not by the end of the year, probably not even within a year or a year and a half, but over the next few years. And so any progress we make in that direction is encouraging in the sense that it would suggest there is a nonrecessionary solution to the inflation problem.

Now, the single biggest thing that I've been looking at this year and that I'm still watching is wage growth. Does that overheated labor market translate to excessively-- or to a rate of wage growth that is just not compatible with the Fed's inflation target? Last year, that was absolutely the case. This year, we're seeing mixed signals. But certainly, the average hourly earnings data seem to be decelerating. And that's providing a hopeful sign.

The reason I focus on wage growth is it's important. It's genuinely uncertain. And I think we can learn something about it in the near term. I don't think it's realistic to expect inflation to decelerate back toward 2% over the course of the next three to six months.

We're still probably going to see some flow-through from faster wage growth to factor service sector inflation. And while I think we will eventually see the end of supply chain disruptions cause some normalization of goods prices, that's not going to happen overnight either. The labor market, to me, is the big wild card where I think we might actually learn something compelling soon.

BRIAN SOZZI: Let's humanize this a little bit more. The average American out there is seeing double-digit increases for stuff-- deodorant, eggs, steak, chicken, you name it. When do those increases start to reverse? Is this-- is that a next year thing?

DAVID MERICLE: So in many cases, in the goods sector, prices have risen a mile above the prepandemic trend. And that opens up the question of, well, to the extent that this just reflects shortages, we ran out of things like automobiles, and so people are bidding up the remaining supply that's available. Could it be the case that as supply comes back, as we transition from an economy of scarcity back to an economy of abundance, as competition kicks back in, we see prices coming down a little bit?

I think for many durable goods, that is probably right. It does look like prices are well above normal levels. That can't just be explained by production costs and that we are seeing genuine scarcity. That seems to be the most obvious reason for this.

Now, we're not going to replenish our depleted auto stock in a short period of time. I think that's probably going to take a year to a year and a half at least. But as that process gets underway, yes, I think there is some scope for some prices on some items to come down. For everything else, I think the hope is simply that prices stop growing so quickly as demand accelerates and that imbalance between supply and demand, both for final consumer goods and in the labor market, starts to look a little bit less extreme.

BRIAN SOZZI: Are you sold on a recession happening in the US next year? And if you are, how deep?

DAVID MERICLE: I think for now, we are still on a narrow path to a soft landing. Now, getting this exactly right, we know, is going to be very difficult. Reducing demand just the right amount, reducing labor demand just the right amount, making sure that this process through reduced consumer sentiment, reduced business sentiment doesn't snowball and spiral into a full-blown recession, I think everybody agrees that's going to be challenging.

For now, I would say, we seem to be undergoing a deceleration, not a contraction in overall economic activity. And we seem to be seeing a healthy slowdown in the labor market that certainly, as of this point, has not overshot where we want to get to.

So so far, I think we're still on the right track. Of course, recession risk is much higher than in a generic, boring year, when we didn't have all of these problems and a big inflation problem to worry about. And our recession odds are reflective of that. But--

BRIAN SOZZI: And what are they? What are you recession odds?

DAVID MERICLE: Our recession odds are 30% at a one-year horizon, just below 50% at a two-year horizon.

BRIAN SOZZI: So your baseline is still a soft landing.

DAVID MERICLE: Our baseline is still a soft landing. At a two-year horizon, I would say roughly even odds. Those odds are something like double or more than double what you would say in-- what you would give in a typical year.