Goldman's Top Economist Explains Why Things Have Slowed Down, But Why A Recession Looks Even Less Likely Now

Jan Hatzius

Photo: Goldman Sachs

Goldman’s top economist Jan Hatzius has a new note out, taking stock of where the US economy is right now.The basic idea is that things have slowed down a bit (due to the fiscal headwinds) but that mostly things are still holding on, and that downside tail risk has diminished.

These two bullet points sum things up:

  1. Our baseline forecast remains unchanged—slow growth in most of 2013 as tax increases and government spending cuts offset the private sector improvement, followed by a substantial acceleration in 2014 as fiscal policy turns more neutral. The economic news remains consistent with this view. Although some of the recent numbers—jobless claims, retail/auto sales, and the latest manufacturing surveys—might suggest an earlier acceleration, our broader current activity indicator (CAI) does show a slowdown to 1.0% in January from around 2% in Q4 and our MAP surprise index has fallen to neutral levels after a few months in positive territory. In addition, we are not sure what to make of the strong consumer data for January. Most consumers probably weren’t aware of the hit to their disposable income until they received their mid-January paycheck, and the anecdotal information—including the Bloomberg story on Friday citing internal Wal-Mart emails about substantial weakness in early February—does suggest that spending has slowed recently. 

2. All that said, the downside risks to our forecast have diminished. This is partly because the data—while hardly stellar—do not show the economy buckling under the $200bn tax increase. But the more important reason is that Republicans in Congress seem to have given up on the idea of using the debt ceiling to force additional spending cuts. So the tail risk that the overall fiscal drag will be much larger than the 1½-2 percentage points we assume for 2013, and that this will push the economy below “stall speed” and into a renewed recession, looks much lower now.

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