A deteriorating jobs market may set off a vicious cycle that drags the economy from sluggish expansion back into an outright recession, according to economists at Goldman Sachs.
The government will report the numbers tomorrow, and the U.S. economy is forecast to have tacked on 57,000 jobs last month, helping the unemployment rate hold steady at 9.2% on the heels of a dismal June when the economy added less than 20,000 jobs.
However, a bout of disappointing economic data released recently has begun to prompt questions about the risk of recession, Goldman said in a note to clients, and has led some market participants to brace for a downside surprise.
Indeed, the investment bank estimates that if the jobless rate unexpectedly climbs 0.1 percentage point to 9.3% in July, and remains unchanged or increases in August, the economy has either entered recession already, or will do so within six months.
The finding relies on what Goldman calls a statistical regularity, meaning it is more of a rule of thumb than a complex statistical model. Starting after the end of the Second World War, a 0.3% to 0.4% increase from the recent trough in the three-month average unemployment rate foreshadowed an economy that has not been in recession for 18-months falling into recession within a six-month period 63% of the time. The increase as of June was 0.17%.
This phenomenon is due to an economic snowball effect: higher unemployment leads to lower household income, which, in turn, reduces consumer spending, causing even more deterioration in the labor markets.