Goldman Sachs economists have downgraded labor market forecasts “assuming that more workers will lose their jobs and most of them will be classified as unemployed,” the Wall Street bank wrote in a customer report.
Goldman Sachs previously predicted that the unemployment rate would peak at 15%. The new forecasts are based on government statistics, the first glimpse of the reopening process and new sources of big data, the bank said.
The federal government’s monthly unemployment statistics only date back to 1948. The current unemployment level is the highest monthly rate ever recorded.
Annual data, dating back to 1929, show that the unemployment rate peaked during the Great Depression at an average of 24.9% in 1933.
Goldman Sachs warned Wednesday that the real unemployment rate will peak 35%, rising from the bank’s previous projection for a 29% peak.
It would be worse than what the White House is publicly preparing. Kevin Hassett, President Donald Trump’s senior economic advisor, told CNN last week that the real unemployment rate could reach 25% before “hoping” to drop after a transition period this summer.
Reopen the economy
Terrible forecasts come when some states have started to reopen their economies, a challenging task given the risk of reviving the pandemic.
Goldman Sachs said that the reopening process poses both positive and negative risks.
For example, the reopening of China suggests that “a much faster pace of recovery is possible.”
Goldman also updated its GDP forecasts, predicting a “slightly more V-shaped path” as states ease block orders. The bank now expects rapid annualized growth of 29% in the third quarter, compared to the previous 19%.
“With the reopening process currently underway in many states in the United States, we have more confidence that a large amount of business will return fairly quickly,” says the report.
But this does not mean that the American economy will soon recover to its pre-crisis dimensions.
Goldman’s request for a faster than usual recovery would also leave the US economy with a production gap, which measures the difference between actual and potential growth, by three percentage points at the end of 2021.
The reopening process itself poses serious health and economic challenges. Health experts have warned that coronavirus infections could go back if social distancing were not followed.
And Goldman noted several “serious health risks”: “insufficient tests and contact traceability” in some states, reopening of high-risk sectors and limited evidence of how effective measures such as social distancing will be effective.
Likewise, there is concern that the economic damage caused by the pandemic cannot be easily reversed, despite efforts by the federal government to help businesses and families.
“The prolonged weakness could cause serious healing effects such as permanent layoffs and closures of companies that delay recovery,” wrote Goldman Sachs economists.
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