The unemployment rate should drop sharply over the course of the year, according to Goldman Sachs, which has one of the most optimistic views among employment analysts.
The bank forecasts the unemployment rate to fall to 4.1% by the end of the year, from last month’s 6.2% and much better than the Federal Reserve’s December forecast of 5%. The Wall Street Journal's survey of 60 economists shows a forecast of 5.3% . Goldman said the hiring boom will come with the reopening of the economy as vaccines roll out, fiscal stimulus gets passed, and pent-up savings start getting spent.
The Federal Reserve has consistently dismissed the unemployment rate as an indicator of the job market because of the huge numbers of people who have given up looking, which has kept the rate artificially low. But Goldman is now saying its new forecast even assumes “a quick recovery in labor force participation," specifically because “most workers who left the labor force still cite the pandemic as their reason and will likely re-enter once life normalizes.”
Federal Reserve Chairman Jerome Powell has repeatedly said the improvement in the jobless rate has been mostly smoke and mirrors, emphasizing that there remain millions of people out of work who are not counted because they have dropped out of the labor force. Last month, he even said the real unemployment rate is likely closer to 10% if those people are added back in.
The investment bank, though, did note risks to its forecast. It said employment could fall below its outlook as the lure of lucrative federal unemployment benefits keeps workers on the sidelines longer or people look for different work because companies implemented things like automation during the pandemic. On the other hand, it said labor-intensive sectors that have yet to recover from the pandemic could improve faster than expected, which would boost the employment outlook above its expectations.
With the rebound in jobs, Goldman also predicts the economy will grow a very strong 7.7% in the final quarter of the year from the fourth quarter in 2020. In December, the Fed estimated GDP for the year would be 4.2%, but with Congress expected to pass a third stimulus package this week, many economists have been revising their estimates upward, mostly into the 6% to 6.5% range, and expect the Fed to do the same at its March 16-17 policy meeting.