Goldman Sachs: Unemployment rate to drop to near 70-year low

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  • The U.S. unemployment rate will drop to 3.25% by the end of 2020, Goldman Sachs predicts.
  • The last time the jobless rate was that low was in October 1953.
  • Economists at the investment bank say the odds of recession next year are dwindling.

Goldman Sachs predicts U.S. unemployment next year will drop to the lowest level since shortly after the Korean War, or more than 60 years, easing recent concerns that the economy is heading toward a recession.

Jan Hatzius, the investment bank’s top U.S. economist, forecasts that the nation’s unemployment rate, now 3.6%, will sink to 3.25% by the end of 2020. The last time the headline jobless number was that low was October 1953, the same year Earl Warren was appointed chief justice of the U.S. Supreme Court and Patti Page’s “How Much Is the Doggy in the Window” reigned near the top of the pop charts.

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According to the Bureau of Labor Statistics, the lowest unemployment rate on record was 2.5%, which was reached in May 1953. Two months later, North Korea and South Korea reached a cease-fire agreement. (The U.S. government began collecting unemployment data in 1942.)

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Goldman’s prediction that the unemployment rate will continue to sink highlights how much the outlook for the economy has changed in just a few months. At this time last year, an economic prediction model maintained by Bloomberg News put the chance of a recession in the next year at 50%.

That was followed by more signs of a slump. In May, investors began to grow alarmed by an inversion in the yield curve — when investment returns on short-term bonds defy the usual pattern by exceeding those on long-term debt, and often a precursor to recessions. That fueled speculation this summer that a downturn was imminent, or had even already started. To shore up economic growth, the Federal Reserve reversed course and begin lowering interest rates.

More recently, however, recession fears seem to be abating. Last week, the government reported the economy grew 2.1% in the third quarter — faster originally thought and on par with growth between April and June. Although the latest forecasts suggest growth could fall below 2% in the final three months of the year, holiday spending appears to be holding up.

Unemployment rising in swing states, despite strong U.S. economy overall

In another sign of labor market strength, the percentage of Americans in the workforce has risen this year to 63.3%. Although the remains shy of the 66% labor participation rate recorded just before the Great Recession, it tops the figure in the early 1950s. In October 1953, when the unemployment rate was at 3.1%, roughly 59% of Americans participated in the workforce.

From Goldman’s perspective, the economy is on solid ground, with Hatzius putting the odds of a recession in 2020 at 20%.

“We expect the drag from the trade war to fade gradually [in 2020],” he said in a recent report, adding that he thinks China and the U.S. will sign a preliminary trade deal by year-end. “Driven by both the better trade news and easier monetary policy ….  these factors point to a modest growth acceleration” next year.

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