Perspectives From Goldman Sachs Global Investment Research

Labor

The May jobs report failed to continue momentum from strong April results. As seen in past reports, the decline in the unemployment rate from 9.9% to 9.7% was largely driven by discouraged workers exiting the labor force, while the miniscule 21k increase in census-adjusted nonfarm payrolls suggests that hiring remains constrained.

Double Dip

No. While the jobs report was clearly a disappointment, it would be premature to conclude that the recovery is stalling. With recent economic data noisy, it is striking just how much the May jobs report looks to be a mirror image of April. Averaging the two results in a census-adjusted payroll gain of 122k and a flat unemployment rate.

Growth Moderation

Yes. Fiscal stimulus and stabilization in inventories account for most, if not all, of the 3½ percent increase in real GDP during this last year of recovery. These supports are due to dissipate with several headwinds still in place. These include: (a) labor weakness, (b) state and local fiscal drag, (c) massive housing and industrial capacity, (d) limited credit availability, and (e) uncertain consequences from the European crisis.

Inflation

Although highly expansionary fiscal and monetary policy have stoked inflationary concerns, disinflation persists due to the sizeable gap between actual and potential output. At roughly 6.5% of GDP, this capacity imbalance should require years to eliminate, leading to a period of contained core inflation measures.

Missing Mandates

Our monetary policy view remains sharply at odds with consensus. While recent events have pushed out consensus rate hike expectations into early 2011, we see no Fed move before 2012 as key data remain far from the Fed's "dual mandate" of price stability and maximum employment (see charts). Admittedly, some of the hawkish noise from Kansas City and Atlanta regional Fed presidents merit attention, but we believe Chairman Bernanke and the majority of FOMC leadership subscribe to a view that the current balance of risks tilts towards deflation and economic deceleration.