Goldman Sachs Warns of Labor Market Weakness Undermining Upbeat GDP Forecasts

Economic Optimism Meets Labor Market Reality

Recent bullish GDP estimates pointing to sustained American economic growth may be presenting an overly optimistic picture, according to analysis from Goldman Sachs. Sources indicate that while official growth projections have strengthened during the government shutdown, underlying employment data suggests significant weakness that could ultimately drag down the economic outlook.

Economic Optimism Meets Labor Market Reality
Diverging Economic Indicators
Labor Market Deterioration
Business Behavior Distorting Growth Figures
Underlying Growth Remains Modest
Youth Employment and AI Impact
Methodological Considerations

Diverging Economic Indicators

According to reports seen by Fortune, Goldman’s chief U.S. economist Jan Hatzius highlighted that GDP estimates have moved up sharply, with Q2 tracking at 3.8% and Q3 at 3.3%. Some estimates reportedly go even higher, with the Federal Reserve Bank of Atlanta suggesting Q3 GDP might reach 3.9% in an October 17 update.

Despite these positive signals and steady stock market performance, analysts suggest the Federal Reserve is still expected to cut rates at least once more before year-end. This apparent contradiction between strong growth figures and continued monetary easing reflects concerns about the sustainability of current economic momentum.

Labor Market Deterioration

The report states that employment may prove to be the critical weakness undermining optimistic growth projections. Goldman’s labor market tightness tracker, which aggregates multiple employment indicators, has reportedly eased to 2016 levels and continues trending downward.

Household surveys show particularly concerning signals, with Hatzius noting that “the expected change in the unemployment rate over the next year has never been this bad outside recessionary periods since the University of Michigan started asking the question in 1978.” Manufacturing and service growth surveys have fallen well below the index midpoint of 50, consistent with employment stagnation or contraction.

Business Behavior Distorting Growth Figures

Analysts suggest part of the disconnect between GDP figures and labor market conditions stems from business behavior changes prompted by trade policy. The report indicates businesses frontloaded durable goods purchases and experienced volatility in inventories and net trade in response to tariff announcements earlier this year.

This frontloading activity created temporary boosts to economic measurements that may not reflect underlying strength. As the Federal Reserve observed, U.S. import volumes from several major trading partners spiked by 75 basis points in March compared to late 2024 levels as businesses rushed to stockpile inventory before potential tariff implementations., according to related coverage

Underlying Growth Remains Modest

Outside of these temporary distortions, the analysis suggests underlying growth remains modest. Survey measures of both manufacturing and services growth that are less affected by frontloading reportedly remain around 50, consistent with stagnation or very slow growth.

Hatzius noted that while reduced drag from higher tariffs, imminent tax cuts, and easier financial conditions have improved the outlook, “we therefore feel comfortable with our view that underlying growth is accelerating only gradually.”

Youth Employment and AI Impact

The report also echoes concerns about employment prospects for younger workers, a theme other prominent economists have highlighted. Federal Reserve Chairman Jerome Powell previously noted that “it’s just gotten tough for people entering the labor force to be hired,” while emphasizing that tech skills remain in high demand.

Goldman’s analysis suggests artificial intelligence may be contributing to these challenges. While the pattern of job growth doesn’t yet show strong correlation with AI exposure at the industry level, employment opportunities for younger workers in tech occupations have reportedly weakened. The report states that “many more management teams are jointly mentioning AI and labor on earnings calls,” suggesting increased AI penetration could further reduce labor demand, particularly in “routine cognitive” occupations.

Methodological Considerations

The analysis emphasizes that job market indicators often provide more reliable information about current growth than preliminary GDP estimates, particularly during periods of data disruption like government shutdowns. This methodological perspective adds weight to concerns that current GDP figures may be sending “too positive a signal” about economic health.

As the report concludes, if underlying growth remains muted or weakens further, historical patterns suggest labor demand is likely to decline further with increased AI penetration, creating additional headwinds for the broader economic outlook.