A Stark Warning From Wall Street’s Biggest Name
In its latest economic outlook, Goldman Sachs has issued one of its most sober assessments yet of the U.S. labor market, warning that employment conditions are now the weakest they’ve been outside of a recession in half a century.
The bank’s analysts argue that this slowdown is inconsistent with the robust GDP growth many forecasters expect for 2025 and 2026, suggesting that economic optimism on Wall Street may be running ahead of reality.
“The U.S. labor market is deteriorating in ways that are historically associated with early recessions,” the note read. “If current trends continue, it’s difficult to see how GDP can remain as strong as consensus projects.”
The Data Behind the Diagnosis
Goldman’s view comes after a series of disappointing job reports, with monthly payroll growth averaging just 75,000 over the past quarter, down from nearly 250,000 a year earlier.
The labor force participation rate has slipped back to 62.4%, and the number of temporary help positions, often a leading indicator of labor demand, has fallen by nearly 400,000 since last summer.
Meanwhile, unemployment claims have trended upward for five consecutive months, and the average workweek has shortened to 34.2 hours, its lowest level since the 2020 downturn.
“These are not numbers you typically see in a thriving economy,” said Jan Hatzius, Goldman’s chief economist. “They’re numbers you see when firms are cutting hours, freezing hires, and preparing for leaner conditions.”
‘Recession-Like’ Without the Recession
What makes the current job market so unusual is that, by traditional measures, the U.S. is not in recession. GDP expanded at an annualized rate of 2.3% last quarter, inflation has cooled, and consumer spending remains resilient.
Yet, Goldman argues that the divergence between growth and employment is unsustainable.
“This is the weakest labor dynamic outside of an official downturn since the early 1970s,” the report noted. “The last time we saw this level of job softness without a recession, the economy was on the brink of one.”
That disconnect, analysts say, makes bullish GDP projections unrealistic, particularly those banking on productivity gains or rapid reacceleration in consumer spending.
Where the Pain Is Concentrated
The slowdown is broad-based but particularly acute in manufacturing, construction, and retail, where hiring freezes have become widespread.
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Manufacturing employment has declined for five straight months.
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Construction job openings have fallen 12% since April.
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Retail employment is down by nearly 100,000 positions year-to-date, a reversal from 2023’s hiring spree.
“The sectors that boomed during the pandemic are still adjusting to a post-stimulus economy,” said Michael Gapen, chief U.S. economist at Bank of America. “It’s not a collapse, but it’s certainly a cooling that’s incompatible with strong GDP forecasts.”
What It Means for GDP Forecasts
Goldman’s current GDP forecast calls for 1.4% annualized growth in early 2026, significantly below the 2.5%–3% range projected by many other Wall Street firms.
The reasoning is simple: when hiring slows, so does income growth. That, in turn, weighs on consumer spending, which accounts for nearly 70% of U.S. economic output.
“Households are showing signs of fatigue,” Hatzius said. “We see slower wage growth, rising delinquencies on consumer credit, and falling discretionary spending. It’s difficult to square those realities with the idea of sustained above-trend growth.”
The Fed Factor
The Federal Reserve, for its part, faces a dilemma. While inflation has eased to just above 2.3%, policymakers remain wary of cutting rates too quickly, fearing a resurgence in prices.
But Goldman warns that waiting too long could amplify labor market damage.
“If the Fed stays tight into a weakening job cycle, the risk of a policy-induced recession rises materially,” the report said. “The soft landing narrative is losing statistical support.”
Markets seem to agree. Futures pricing now implies a 70% chance of at least two rate cuts by mid-2026, up from 45% a month ago.
Investor Sentiment Turns Uneasy
Despite resilient equity markets earlier this year, investor sentiment is showing cracks. The Dow Jones Industrial Average has fallen 4% in the past month, while bond yields have dipped as traders flock to safety.
“Equities are priced for perfection,” said Savita Subramanian, head of U.S. equity strategy at BofA. “But the job market isn’t perfect. It’s flashing yellow.”
Goldman’s warning has reignited debate over whether corporate earnings can hold up if employment, and by extension, consumer demand, continues to soften.
A Fragile Middle Ground
For now, economists describe the situation as a “non-recessionary slowdown” – a fragile equilibrium where growth continues but momentum fades.
“It’s not a crisis, but it’s a warning,” said Gapen. “If hiring doesn’t rebound in the next two quarters, the drag on GDP will be hard to ignore.”
In the meantime, workers are feeling the pinch. Wage growth has slowed to 3.4%, down from 5% in 2022, while job-switching bonuses and signing incentives have largely disappeared.
“Job seekers are realizing it’s not 2021 anymore,” said Hatzius. “The balance of power has shifted back to employers.”
Goldman’s Bottom Line
Goldman Sachs isn’t predicting an imminent recession, but it is questioning the optimism embedded in Wall Street’s forecasts.
“This is not an economy on the verge of collapse,” the report concluded. “But it’s also not one poised for acceleration. The labor market is sending a clear message: the era of effortless growth is over.”
