Goldman Slashes US Growth Forecast, Now Sees Just 1.2 Rate Hikes In 2019

It was just three weeks ago that Goldman, having long held a painstakingly upbeat outlook on the US economy for 2019, finally capitulated and trimmed its hawkish forecast for 4 rate hikes in 2019, calling for less than a 50% probability of a rate hike in March, even as the bank continued to sneers at the market's current pricing for the funds rate, which now anticipates no full hike in all of 2019.

Not anymore.

In the last economic note for 2018, Goldman chief economist Jan Hatzius says that in light "of the recent FCI tightening [i.e. market turbulence] and weaker US data" the bank has not only slashed its near-term GDP outlook, but taken down its full year rate hike forecast to a paltry 1.2 for all of 2019 (keep in mind, this number was 4 as recently as the start of December), to wit:

We have revised down our US growth forecast for the first half of 2019 from 2.4% to 2%; we continue to expect growth of 1¾% in H2.

To justify its abrupt reversal, Hatzius presents three "strong" reasons why we should expect slower growth in 2019 vs recent years.

  • "First, a slowdown is already evident in the numbers. As shown in Exhibit 1, both real GDP and our current activity indicator (CAI) were running at 3½-4% over the summer, but the pace has recently fallen to the 2-2½% range."

  • "Second, the impulses from fiscal policy and financial conditions are turning more negative. In the second half of 2018, fiscal policy contributed nearly ¾pp to growth via lower taxes and higher spending, but this number will gradually diminish to roughly zero by the end of 2019. In addition, financial conditions have turned into a significant headwind and could take more than 1pp off real GDP growth in the first three quarters of 2019. This means that the demand-side case for above-trend growth is weakening significantly."

  • "Third, the economy needs to slow in order to limit the risk of a dangerous overheating down the road. Unemployment is already ¾pp below our 4½% estimate of the rate consistent with a 2% inflation rate in the medium term. And Exhibit 3 shows that a variety of other measures of labor market slack confirm the message of labor market tightness. Given the close correlation between labor market overheating and subsequent recession, Fed officials will want to see a significant slowdown in growth. This means that if financial conditions reverse too much of their recent tightening, Fed officials would likely turn more hawkish to keep growth from rebounding too much."
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