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GDP growth acceleration is still ‘a ways off’: Goldman’s Hatzius

Yahoo Finance’s Brian Sozzi, Julie Hyman, and Brian Cheung discuss economic action and outlook with Jan Hatzius, Goldman Sachs Chief Economist and Head of Global Economics and Markets Research.

Video Transcript

- Let's talk some economics here. There remains wide ranging opinions on the momentum in the global economy which is clearly battling high levels of inflation, supply chain bottlenecks, and of course, the ongoing COVID 19 pandemic. Fortunately, we have Goldman Sachs' Chief Economist, Jan Hatzius here to drill into all of this. Jan, always nice to see you. Thanks for coming on to kick off this week. I really liked your morning note and the headline took me by surprise a bit says, how fast is growth slowing? So let's start there. How fast is growth slowing in the United States really because of a range of issues?

JAN HATZIUS: Great to be on. I would say growth is clearly slowing. Obviously we're past the peak rate, but it's a relatively gradual slowdown. We're still growing at a pretty fast pace pretty clearly above the longer term trend, we're at 3 and 1/4% for the third quarter we get those numbers in less than two weeks. And then beyond Q3 since then obviously in Q4 and looking into 2022. We think we'll be in the 4%, maybe 4 and 1/2% range the next couple of quarters. And reasons for that still rapid pace of growth are, one, consumers still have a significant amount of cash on their balance sheets, pent up savings are significant.

Number two, the pandemic is improving from the hit from Delta. And then number three, some of the supply chain issues basically mean that right now inventories are being liquidated and as we go forward we think production eventually catch us up and that's a positive force for growth. As we go through 2022 though, I think we'll see more of a substantial slowdown because a lot of these near-term forces are probably not very long lasting. So in the second half of the year, I think will be significantly slower.

- Jan you mentioned what's going on with industrial production, it's Julie here. We got industrial production numbers for September this morning and we saw a decline of 1.3%, of course a lot of that has to do with what happened in the auto sector, a 7.2% decline in motor vehicles and parts as well. And I know that's something that your team is watching closely. So when you talk about the supply chain and production, really there are a lot of questions right now as to how long all of that is going to take to shake out. What is your estimation as to when we will see normalization of the supply chain?

JAN HATZIUS: I mean, I think things are going to get better I think once we're in 2022. I wouldn't really expect the major change in the remainder of this year. Next year though as growth slows on the demand side and as the COVID disruption in the manufacturing sector moves further into the rear-view mirror, we would expect a decline in the supply of delivery indices and in the various business service. I mean, that's probably the best near-term tracker of what's going on with these supply chain disruptions.

We've seen basically stabilization at very high levels in the last few months wouldn't really expect a major change on that through the end of the year but then a gradual improvement as we go through next year. Because I do think that the strength on the demand side and the enormous amount of fiscal support that's gone to households has been an important factor in that. Obviously that's diminishing and we also should see a bit more of the spending from households flow into the service sector over time and a little bit less into the goods sector. All of that I think is going to reduce some of these pressures, but it's not going to happen quickly I think.

BRIAN CHEUNG: Hey Jan, it's Brian Cheung here. I want to ask you about what the implications are this from a just raw inflationary standpoint. Because people might not be feeling GDP growth but they might be feeling inflation certainly when they go to the stores. And you were talking about demand, when you take a look at the sea component in the GDP equation, that might not account for what supply chain issues are restraining the ability of people to consume, if the goods certainly aren't available if the services simply aren't available to them.

So what's your measure? How do you approach trying to measure the underlying demand because that seems to be the big story between transitory versus permanent, that whether or not demand is going to be robust even after these supply chain issues do abate, do you still have some way of looking at that and parsing that out in your data?

JAN HATZIUS: I mean, I do think demand is very very strong at the moment and total spending as well above total production, the difference between those two is inventory investment. Inventories are being drawn down right now because demand is so strong. I think as we go into 2022, demand is going to slow, I don't think it's going to fall but I think it is going to slow significantly and that is going to be a key factor for reducing the tightness that we're seeing at the moment.

So very strong demand at the moment, but much less robust demand next year because fiscal policy is going from a big tailwind to demand in 2021 to a significant headwind to demand in 2022 even if as we assume President Biden manages to pass a significant part of his longer term fiscal package.

- Jan, when do you see GDP growth in the US re-accelerating and what's the trigger for it?

JAN HATZIUS: I think that's still a ways off because we're still pretty close to these very rapid growth rates of the spring. The trend over the next year or so is probably going to be downwards, late 2022 early 2023 we think will be growing at 2% or a little bit less. That I think is going to be a temporary air pocket driven by the payback for the fiscal support, subsequent to that, our baseline forecast has some acceleration, I would caution that obviously there are lots of different factors out there. There have been many curve-balls in this recovery, so my confidence especially as I go out this far in the forecast is relatively low.

- Yeah that makes sense given the unpredictability of this cycle thus far. One other area that has been maybe a little bit tricky to predict is the housing market. And we just got other numbers on that, that US home-builder sentiment rose to a three month high in October. You guys have been predicting the increase in housing prices and you say prices are going to go up a further 16% in the US by the end of next year. What effect in turn is that going to have on economic growth? On balance is that going to be a contributor or is that going to be a limiter if people are not able to afford those homes?

JAN HATZIUS: Well, on balance, I think it's a contributor probably. At least on the consumer's side because you're probably adding a bit to the wealth effect, I don't think it's going to be a massive impact. Typically the wealth effect is measured in a small number of cents on the dollar, maybe 0.03$, 0.05$ on the dollar of additional housing wealth. But I think you make a good point that on the home-building side and on the home purchase side, these high prices do seem to have an impact on how people think about whether it's a good time to buy a home. I mean, there are survey results that say a pretty small share of the population now thinks is a good time to buy a home and under our forecast for what happens to house prices over the next year, that is probably going to get worse, not bad, better. So there could be some offset there.

In general I do not think that housing is going to be the main swing factor on the ups and downs of growth. I mean, it's really more the factors I talked about earlier. What happens to the virus near-term probably positive, pent up savings and the inventory cycle and the supply chain issues, housing is probably below those three factors in terms of importance.

BRIAN CHEUNG: We've heard this S word thrown around stagflation, would you describe the risk in let's say 2022 or 2023 for US economic output and unemployment and inflation to look like a stagflation or environment? If not, is there another type of portmanteau that you would suggest to describe what we should expect to see in the next few years?

JAN HATZIUS: Well, I don't think we're in a stagflationary environment now. Obviously inflation is much higher than it was a much higher than most forecasters expected. But growth is also pretty robust at the moment, and I think you can see that in a lot of different indicators. So the stack part of it isn't really operative. Going into next year, I think growth, at least if you go into the second half of the year it's going to be a lot weaker. So the stag part maybe you would subscribe to. But I also think inflation is going to be a lot lower. Because my view is that a significant part of the strength in inflation is quite temporary.

It's basically driven by this upward pressure in the goods sector for a variety of reasons we think that's going to come off, so goods, prices, used cars, and other areas like that are going to go from being a major positive contributor to inflation to probably being a negative contributor, and I think that's going to take you down to numbers much closer to the Fed's 2% target.

So I would say it's going to feel a little bit more like a traditional cyclical deceleration in growth because growth is going to be weaker we think. Inflation is going to be lower, of course, we're also going to be much closer to full employment. So it's not necessarily a bad thing to see slower growth, but it's going to feel more like a traditional slowdown I think.

- And Jan, we recently talked to your colleagues over on the energy team and they're clearly looking for higher oil prices. At what price, what oil prices really start to lead to demand destruction on the part of consumers?

JAN HATZIUS: Well, I mean, I think it's a negative factor now because you are cutting into disposable income if you have to pay more for a given amount of energy consumption. So I don't think there's necessarily a point below which it doesn't matter and above, which it matters. I think it matters now. It's not been a sufficiently large hit to derail the consumer recovery and we saw that in the September retail sales numbers, but at the margin I think it does contribute to the deceleration.

And the US has so far not been hit as hard as some other places in Europe or Asia where energy prices have been a bigger issue, in China it's been a significant issue, in the UK it's been a significant issue. The US so far has gotten off somewhat more easily, but it's a drag nevertheless.

- I am hoping for a warm winter, no doubt about it. Jan Hatzius, Goldman Sachs Chief Economist, always nice to see you. Have a great rest of the week.