VIEW: Goldman Sachs Cut ’22 & ’23 GDP Growth Forecasts

Goldman Sachs note that “In April, we estimated that a slowdown in GDP growth to 0.5-1pp below potential would be necessary to cool the labor market from its most overheated level in postwar US history, slow wage growth, and bring price inflation back down toward the FOMC’s 2% inflation target.”

• “Since then, our financial conditions index (FCI) has tightened by over 100bps, which should create a drag on GDP growth of about 1pp. As a result, we now think the rate hikes that are currently priced into financial conditions are in the ballpark of what is ultimately needed to restore balance to the labor market and cool wage and price pressures. We therefore expect that the recent tightening in financial conditions will persist, in part because we think the Fed will deliver on what is priced.”
• “We are therefore cutting our growth forecasts for 2022 and 2023 to incorporate this recent FCI tightening. We now expect GDP growth of +2.5%/+2.25%/+1.5% in Q2-Q422 and +1.25%/+1.5%/+1.5%/+1.75% in Q1-Q423. These changes imply a downgrade in 2022 GDP growth to +2.4% on an annual basis (vs. +2.6% previously) and to +1.25% on a Q4/Q4 basis (vs. 1.6%), and a downgrade in 2023 growth to +1.6% on an annual basis (vs. +2.2%) and to +1.5% on a Q4/Q4 basis (vs. +2.0%).”
• “While this slowdown in growth should help lower job openings, it is also likely to raise the unemployment rate a bit, particularly since the job openings rate typically only falls when unemployment spikes in recessions. We remain optimistic that a sharp rise in the unemployment rate can be avoided, especially since typically the job openings rate declines more and the unemployment rate increases less when the job openings rate is very elevated, like it is today. Additionally, the current overshoot in openings is concentrated in industries where the job openings rate has historically been more sensitive to FCI tightening.”
• “Although we continue to expect that momentum in job gains will push the unemployment rate to a low of 3.4% in the next few months, we now expect that the unemployment rate will subsequently rise back to 3.5% at end-2022, and rise further to 3.7% at end-2023.”