Goldman Sachs is optimistic about the economy this year. Economists at the bank believe the economy will grow a healthy 2.3% this year, the unemployment rate will remain below 4%, and the probability of a recession is only 15% – all of which are more optimistic than the average market forecast. They also believe inflation, which excludes food and energy prices, will continue to fall, falling to just above 2% by the end of the year (using the Fed’s preferred measure).
Economic forecasts abound. Why should you pay attention to Goldman Sachs? First of all, because Goldman Sachs economists have always been firmly in the soft landing camp, which now seems to be quite prescient.
Secondly, the company’s chief economist Jan Hatzius made a forecast in 2008 that was also different from the average market expectations, unexpected and contrary to the trend. At the time, he accurately warned that mortgage defaults would lead to a severe economic recession.
Predicting a big event accurately once may be a matter of luck, but predicting it twice will earn you countless fans. Hargerth is one of the most respected economists on Wall Street and in Washington.
“Everyone on the White House economic team reads Goldman Sachs articles obsessively, with more interest than any other analyst,” said Jason Furman, who served as President Barack Obama’s economic adviser from 2009 to 2017. Jared Bernstein, the president’s economic adviser, recently said on X that Hargerth was “outstanding.” According to Jerome Powell’s publicly released schedule, the Fed chairman has met with him multiple times.
It certainly helps that Hutchison’s forecasts have been pretty good. He is one of the few economists to win the Lawrence R. Klein Award for Blue Chip Forecast Accuracy twice (2009 and 2011). While like most economists, his inflation forecast for 2021 and 2022 is too low, he ranked among 68 economists in The Wall Street Journal’s ranking of the accuracy of their 2023 forecasts. Ranked fifth.
What really attracts followers, however, is the depth and volume of his team’s research. His team includes 12 economists based in the United States (including Chief U.S. Economist David Mericle) and 29 economists around the world. They regularly publish detailed and quantitative answers to some hot issues, such as the impact of AI on How much of a boost to long-term economic growth (a big one), the economic benefits of replacing lockdowns with masks (a big one), and how much of an impact on inflation a sharp increase in union worker wages would have (a small amount).
The team compiled its own set of economic indicators. These include the Financial Conditions Index, developed in 2000 by Hargers and his then-boss Bill Dudley, which has been widely imitated and measures the full effect of monetary policy through a composite of interest rates, bond yields, stock prices and the U.S. dollar.
eclectic attitude
Hagers, 55, was born and raised in Germany. He said in an interview that his first hobbies were history and politics. “In these fields, anything is possible, which makes him a little frustrated. A lot of it is opinions. There are not a lot of analytical frameworks.”
Therefore, he studied economics at the University of Freiburg and then received his PhD at the University of Oxford. He gave up being a professor when he decided that his interests were too broad for academia. He joined Goldman Sachs in 1997, succeeded Dudley as the bank’s chief U.S. economist in 2005 (Dudley later became president of the New York Fed), became a partner in 2008, and became chief economist in 2011. Served as Research Director in 2020.
Hagers’s eclectic approach is crucial to his approach. Dudley said Hutchison doesn’t get hung up on any one label, whether it’s bullish or bearish.
Like the author, Hazhesi is also a fan of psychologist Philip Tetlock. Tetlock divides experts into two types: hedgehogs and foxes. Hedgehogs are proficient in one aspect and see the world through this perspective; while foxes know many things. “You have to have some foxes in terms of analytical frameworks,” Hagers said. No one framework fits all economic and interest rate cycles.
God predicts
In 2007, many analysts dismissed the losses on subprime mortgages as being like a bad day for the stock market. In a report in November of that year, Hutchison called the analogy problematic. Citing research by economists Tobias Adrian and Hyun Song Shin, he pointed out that stocks are mainly held by long-term investors such as pension funds, who will “passively accept losses in net assets.”
Home loans are held by banks, investment dealers, hedge funds, and leveraged institutions such as Fannie Mae and Freddie Mac. For every dollar lost, these investors must shrink their balance sheets to maintain capital ratios. This is an important reason why Hazhesi predicts that economic growth in 2008 will be weak and the risk of recession will be higher than analysts’ average expectations.
After that recession, Hargerth once again departed from mainstream forecasts, accurately predicting that bond yields would fall despite huge federal deficits. Drawing in part on British economist Wynne Godley’s work on credit flows, Hargerth reasoned that with private lending so weak, public borrowing would not push up inflation or interest rates.
Hagers has also stumbled at times, especially with his predictions about the Federal Reserve’s interest rate moves. After the COVID-19 epidemic, he failed to calculate the surge in inflation and did not realize in time how aggressively the Federal Reserve would raise interest rates to curb inflation.
“You can be right about the general trend but wrong about the specific moves, especially when it comes to the behavior of humans or central bankers,” Hagers said.
future outlook
Regarding the current overall situation, Hazhesi still emphasized that the inflation rate is expected to return to 2% without an increase in the unemployment rate. At the end of 2022, his team blatantly used the most dangerous word on Wall Street to title its 2023 outlook: “This cycle is different.”
The company believes that the overheated labor market will cool down through a reduction in job vacancies rather than an increase in unemployment, and an increasingly resilient supply side will hold down inflation. In the end, the supply-side rebound even exceeded Goldman Sachs’ original expectations, and growth in 2023 exceeded Goldman Sachs’s optimistic forecast.
For 2024, Hutchison and the company expect this to be even more true.
Many economists believe the lagged effect of rising interest rates could trigger a recession. But Hutchison believes the lag period has been misunderstood. The lag period for interest rates on output levels was long, but the lag period on output growth was short and has passed, he said. Therefore, as supply recovers further, inflation can continue to subside alongside solid economic growth.
The latest data is not kind to Goldman Sachs’ forecast. Retail sales were weak in January and inflation remained high. Goldman Sachs blames higher inflation on price increases at the start of the year, which reflect past rather than future trends.
Housing costs are also rising rapidly. But in a 13-page report published on Sunday, Goldman Sachs dug into private rent data and the Labor Department’s calculations and concluded that January’s jump was an anomaly.
There are still many people who are skeptical about a soft landing. Dudley predicted a sharp increase in unemployment and a recession. However, Hagers’s former boss believes: “Things will definitely develop in the direction Hagers predicted.”
2024-02-24 00:25:00
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