GOLDMAN: The Economic Crisis Ends In 2013

jan hatzius

Goldman’s Jan Hatzius is out with an excellent note that essentially calls for the economic crisis to end in 2013.

The title of the note is The US Economy in 2013-2016: Moving Over the Hump, and the gist is that 2013 will be the last year of sub-trend growth.

Following 2013, the US will see growth above 3%, which is not amazing, but far better than what we’ve seen since the economy began recovering in 2009.

What’s important to understand is that this isn’t just based on some vague optimism or a foggy notion of “getting through a current rough patch,” but rather a financial balances model that has put Hatzius at the forefront of Wall Street economists in understanding this economic period.

The essence of the model is essentially this chart, which recognises that private sector surpluses (rising corporate and household savings) is the mirror image of public sector deficits.

financial balances

[credit provider=”Goldman Sachs”]

The notion that private and public sector deficits offset each other is critical for understanding what we’ve seen in this downturn, though the framework is still not part of the common parlance. Richard Koo has been writing about this forever. In the academic world, University of Chicago professor Amir Sufi has written a lot about private sector balance sheets, and how they’ve made this crisis unique.

After 2013, Hatzius writes, the US economy will be getting significant benefits from a relevering private sector (lower savings) with the worst of the fiscal drag coming to an end (it might seem weird to talk about a fiscal drag, when we’re running trillion-dollar deficits, but the truth of the matter is that the deficit has actually been shrinking at its fastest pace ever in recent year).

Says Hatzius:

…an update of our financial balances model suggests that grow this likely to improve starting in the second half of 2013. Homebuilding looks set to recover strongly, the corporate sector should start to spend a larger share of its cash flow, and the personal saving rate will probably edge down a little further. 

All told, the private sector is likely to deliver an impulse of around 1.5 percentage points to real GDP growth in 2014-2015. Even with a continued drag from fiscal policy, this should result in solidly above- trend growth of 3% or a bit more. This would still not be a very rapid recovery by the standards of past cycles, but it would be clearly better than the 2%-2.5% seen in the recovery so far.

Breaking it down more specifically, Hazius anticipates a significant boost from residential investment, plus modest boosts from corporate spending (which will return to releveraging) and a boost from a decline in the household savings rate.

Altogether, the private sector positive “impulse” to the economy looks like this:


[credit provider=”Goldman Sachs”]

In conclusion, says Hatzius:

What can we expect in coming years? If our estimates and assumptions are correct, 2013 is likely to be a more extreme version of 2010-2012, with a bigger positive private sector impulse that is offset by a bigger negative public sector impulse but still leaves growth around trend. But we expect the net impulse to turn positive in subsequent years, assuming that 2013 marks the peak rate of fiscal contraction. By 2014-2015, the decline in the ex ante private sector balance should be contributing around 11⁄2 percentage points to the overall growth impulse, but we currently assume that fiscal policy will subtract only 1⁄2- 1 percentage point, for a net impulse of 1⁄2-1 point. This ought to be a recipe for clearly above-trend growth.

The economy for years has been characterised by below-trend growth and a private sector that remained in massive surplus (meaning excess savings). That’s been the essence of what we’ve seen, and Goldman believes that’s almost over.