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Goldman Delivers The Bad News: No Jobs Explosion Is Coming To Save The Economy

|Includes: Goldman Sachs Group Inc. (GS)
While net job growth will continue going forward, predictions that we'll see a special surge of  'pent-up hiring demand' are flawed, according to Goldman's Jan Hatzius.

Goldman's Jan Hatzius:

The job market has not diverged significantly from its historical relationship with GDP; in other words, “Okun’s law” has not broken down. We show this by (1) plotting employment against GDP, (2) estimating the statistical relationship between jobs and GDP, (3) plotting productivity growth in this cycle versus previous ones, and (4) estimating the statistical relationship between productivity and GDP. The implication is that forecasters who expect a large amount of “pent-up hiring” in coming months are likely to continue to be disappointed.

They've sliced it from all angles and still can't be bullish.

Plotting employment against GDP doesn't show any reason to think it will be 'different' this time
Plotting employment against GDP doesn
'The chart shows a plot of the year-on-year growth rate of nonfarm payrolls against the year-on-year growth rate of real GDP. There is no visual evidence of any break in the relationship. While employment fell unusually sharply in the 2007-2009 recession, it fell no more (or less) sharply than one would have guessed based on the drop in real GDP and the prior relationship between the two variables.'

Source: Goldman Sachs

Productivity doesn't argue for a special 'hiring dividend' either
Productivity doesn
'The chart below shows the residuals (i.e. prediction errors) for the two unemployment rate equations for the period since 1985... However, in the last three quarters the errors have again come in predominantly on the lower side, i.e. the unemployment rate has done a bit better than one might have guessed on the basis of the historical relationship whereas the common belief is that it has been worse. Overall, we see no evidence for any meaningful deviation of the unemployment rate from its historical relationship with real GDP.'

Source: Goldman Sachs

No sign of a special boost in the payrolls/GDP relationship either
No sign of a special boost in the payrolls/GDP relationship either
'The chart below repeats the same exercise for nonfarm payroll growth. Again, there is no systematic evidence that employment has been unusually weak. [thus there's no reason to expect a special boost in future hiring] While the residuals from the equation estimated over the 1947-2010 period have been negative for the past few years, their size is not out of line with the deviations occasionally seen in past cycles (e.g. the early 2000s). Moreover, the residuals from the equation estimated over the shorter 1985-2010 period have on average actually been positive for the last year.'

Source: Goldman Sachs

Sorry, recent productivity trends don't offer hope for a special surge
Sorry, recent productivity trends don
'Plotting productivity growth. A different way of looking at the relationship between the job market and GDP is via productivity, which is simply defined as real GDP divided by hours worked. Although productivity has grown quickly in absolute terms, the chart below shows that the strength has not been all that different from that seen in prior cycles. It is simply quite common for productivity to surge in the early part of an expansion.'

Source: Goldman Sachs

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