Why Goldman Sachs is cautioning about a recovery without job growth

Is a "Jobless Recovery" on the Horizon?

This year could mark a period of economic growth without significant job creation, according to economists at Goldman Sachs.

In a recent client report, David Mericle, chief US economist at Goldman Sachs, suggested that the economy may experience a stretch of growth reminiscent of the early 2000s, when job gains lagged behind economic expansion.

Mericle highlighted several factors that could restrain the labor market in the coming months. These include sluggish initial job growth, a continued decline in job openings, and a growing trend among businesses to discuss layoffs and turn to artificial intelligence as a way to cut labor expenses.

Looking ahead to 2026, Mericle described the labor market outlook as potentially unstable.

He stated, "Our most confident projections for 2026 are for GDP growth to surpass consensus expectations and for inflation to remain below consensus. However, the labor market remains a source of uncertainty—we anticipate stabilization but recognize the risk of further weakening."

Recent Employment Data Raises Concerns

The latest employment figures reinforce Goldman Sachs' cautious stance. December's jobs report revealed only 50,000 new positions, falling short of the anticipated 70,000. Additionally, job creation numbers for October and November were revised downward by 76,000.

Over the past year, the economy added 584,000 jobs—the slowest annual increase since 2020. Despite this, more than 2 million jobs were created in 2024.

There has also been an uptick in the number of people working part-time due to an inability to secure full-time employment.

Most of December's job gains were concentrated in healthcare, while retail and other industries saw limited growth. Manufacturing, impacted by tariffs from the Trump administration, lost 68,000 jobs over the last year.

Signage for a job fair on Fifth Avenue in New York City. (Reuters/Andrew Kelly/File Photo)

Wall Street Remains Optimistic

Despite labor market worries, investors are expecting a strong year for corporate profits, fueled by positive expectations for the economy, advances in AI, and stable geopolitical conditions.

According to FactSet, S&P 500 earnings are projected to grow by double digits each quarter in 2026, with the fourth quarter expected to see an 18.1% increase. Overall, annual earnings are forecasted to rise by 15%.

Strategists have set an ambitious year-end target for the S&P 500 at 8,010, representing an 18% jump from current levels.

Potential Risks to Market Optimism

However, the possibility of a "jobless recovery" could dampen this optimism, even if the Federal Reserve implements another rate cut.

Tim Urbanowicz, chief investment strategist at Innovator Capital Management, commented: "We believe the labor market is still in a balanced state, justifying the Fed's current rate policy. Rates are unlikely to rise and may even decrease, but there are risks in both directions."

He added, "If the economic upswing goes too far, a key threat to the market is a potential rise in the 10-year Treasury yield. Conversely, if AI begins to replace jobs on a large scale, that could pose significant challenges."

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