These 3 indicators are pointing to a healthy labor market similar to the pre-pandemic boom, according to Goldman Sachs

These 3 indicators are pointing to a healthy labor market similar to the pre-pandemic boom, according to Goldman Sachs

As inflation creeps downward, investors are increasingly turning their attention to the labor market to look for clues of a soft landing.

Both July and August employment data fell short of Wall Street expectations after revealing lower-than-expected job additions, sparking fears of a recession and sending stocks tumbling. The highly anticipated September jobs data will be released this Friday.

Investors shouldn’t be worried, though. Labor market fundamentals remain strong, according to Joseph Briggs, co-lead of Goldman Sachs’ global economics team and a former Federal Reserve senior economist.

“If we take a broad assessment across a number of different labor market indicators, they are still roughly where they were from 2017 to 2019, and that was a pretty healthy labor market,” Briggs said.

In Briggs’ view, the following three indicators point to a normalizing late-cycle labor market, and in turn, a strong economy.

3 signs of a healthy labor market

Layoffs are one important indicator of the job market’s health, and luckily, companies aren’t laying off many workers right now.

Both layoff rates and initial claims are hovering at or below pre-pandemic levels, Briggs pointed out. Initial claims, or first-time jobless claims filed by individuals seeking unemployment benefits, dropped to a four-month low of 218,000 last week.

Low layoffs, in particular, are a positive sign because they help the economy avoid a dangerous feedback loop, Briggs said. Layoffs lead to decreased consumer spending, hurting companies, which leads to even more layoffs.

Thankfully, the labor market isn’t experiencing this sort of spiral right now. “We’re not really seeing any signs on a widespread basis that employers are actually firing workers,” Briggs said.

On the contrary, consumer spending is quite robust, driven by continued job gains and wage growth, according to Briggs.

Wage growth is improving and exceeding inflation this year, posting 3.5% year-over-year growth in August 2024. Real average weekly earnings increased 0.2% from July to August of this year. Briggs predicts that US workers could see 2.0 to 2.5% real income growth in the upcoming year.

The US economy is also adding jobs at a steady pace that supports consumer spending, Briggs said. In August, 142,000 jobs were added, which Briggs sees as a healthy monthly increase. He expects the US economy to continue adding jobs at a rate of 140,000 to 150,000 a month. This pace of job growth isn’t as aggressive as it was during the post-pandemic hiring frenzy, but that’s to be expected as the labor market normalizes, and investors shouldn’t take this development as an indicator of recession.

Lastly, GDP growth remains strong, setting the stage for a favorable hiring environment. The US economy posted 3% annualized GDP growth in the second quarter of 2024, faster than the 1.4% growth rate in the first quarter and beating Wall Street expectations.

Briggs is optimistic about future GDP growth as well. He expects the impacts of the Fed’s rate-cutting cycle to start manifesting in the economy relatively quickly, boosting US GDP within the next few quarters.

The overall economy has been improving in the past few months in anticipation of rate cuts and will continue to do so, in Briggs’ opinion. Most notably, mortgage rates have been decreasing.

“The changes that we’ve seen over the last few months point to about a half-point boost to annualized GDP growth over the second half of 2024 and the first half of 2025,” Briggs said.

“There are sectors of the economy that are still highly rate sensitive, and these will have a clear impact on GDP growth,” he added.

These areas include the housing market, consumer durables, small-cap companies, and industries such as software and pharmaceuticals. With multiple areas of the economy set to benefit from rate cuts, investors should be confident that a soft landing and strong labor market are in the cards.