It’s the kind of headline that the worst people alive will probably warp to fit their narratives, but Goldman Sachs thinks that the answer to some puzzling US economic data is a jump in immigration.
US economic growth was far stronger than most people expected last year, thanks to some absolutely monster jobs reports and consumer spending that made a mockery of fears that bad vibes might cause a recession.
However, despite robust job creation the US unemployment rate has actually edged up from a five-decade low of 3.4 per a year ago to 3.9 per cent. At the same time, employment surveys of companies and households have been diverging sharply , further confounding many economists.
Goldman Sachs reckons that the answer to “one of the biggest puzzles of the last year” is a sharp increase in net immigration, which has increased the size of the American labour force and enhanced US economic growth potential.
Recent studies suggest that Census data used for the household survey of the employment report understated immigration in 2023. We estimate that immigration was 1½mn above the trend of roughly 1mn per year in 2023, which implies an 80k boost to the monthly breakeven rate of job growth to 155k. We expect immigration to be about 1mn higher than usual this year, implying breakeven job growth of around 125k and a 0.3pp boost to potential GDP growth in 2024 from faster labor force growth.
The result is that Goldman — already one of the more optimistic investment banks on Wall Street — is once again lifting its actual US growth forecast for 2024.
We have updated our payrolls and GDP forecasts to incorporate the ongoing boost from above-trend immigration. We now expect payroll growth to average 175k/month this year and slow to 150k/month by year-end, though we expect this to only lower the unemployment rate a touch to 3.8% by year-end. We have also raised our 2024 real GDP growth forecast by 0.3pp to +2.4% on a Q4/Q4 basis (or +2.7% on a full-year basis), mostly by upgrading consumption growth.
Basically, Goldman Sachs thinks that immigration will short-circuit the Sahm Rule , which stipulates that a recession is in the mail when the three-month moving average of the US unemployment rate rises by half a percentage point off its 12-month low.
. . . The recent increase in the unemployment rate has been led by a higher unemployment rate amongst foreign-born workers, which itself likely reflects the combination of elevated immigration and a higher rate of unemployment amongst recent immigrants. This implies that the increase in unemployment over the last year mostly reflected an increase in labor supply from new immigrants, which is unlikely to trigger a vicious cycle of job loss, income loss and further unemployment that is typically associated with increases in the unemployment rate.