We’re still comfortable, certainly, with the idea that it’s going to take a long time before we need to see monetary tightening.- Jan Hatzius
Economic Outlook: United States
Jan Hatzius, chief economist of Global Investment Research (GIR) at Goldman Sachs, shares his perspective on the US economy with GIR senior strategist Allison Nathan. In the second video, Hatzius discusses his expectations for developments in US monetary policy in the years ahead.
Economic Outlook: United States
Recorded on June 12, 2014
ALLISON NATHAN: Jan, as Goldman Sachs’ chief economist, you have said that the U.S. economy is now growing above trend for the first time since the global financial crisis, despite the fact that GDP early this year was actually negative. How do you square this?
JAN HATZIUS: It is quite a big contrast between the GDP numbers and other measures of economic activity that we summarize in our current activity indicator, which are higher frequency numbers, such as the payroll numbers, jobless claims, manufacturing surveys and so forth. When we look at those, we see an acceleration in growth really since early 2013, and especially over the last few months, to a year-on-year rate of 2.7 percent at this point. Which is still not superfast, certainly by the standards of past economic recoveries, but it is the fastest pace since the crisis. And it’s the first time really that we’ve been clearly in above-trend growth mode. We would put trend at somewhere between 2 and 2-and-a-half percent. We think the GDP numbers in this particular case are quite misleading. They are quite noisy. They jump up and down a lot. They get revised a lot. So we really think that looking at broader measures of activity that are available from something like our current activity indicator is probably better.
ALLISON NATHAN: You actually expect further improvement in growth heading into the second half of this year. What’s driving that expectation, and how much conviction do you have in that view?
JAN HATZIUS: I’d say there are basically two things that we would attribute that to. One, we think that we’ll see some recovery in capital spending growth. Capital spending growth was actually quite good early in the recovery -- 2010, 2011 -- but then it slowed quite sharply in early 2012. And when we look at, again, the official numbers in the GDP report, capital spending hasn’t really shown a reacceleration. But we think when we look at surveys of companies about their capital spending activities, that that probably understates activities somewhat, and at least over the next couple of quarters we’ll see an acceleration in that sector.
The other sector that we think is probably going to show improvement is housing. Housing has been quite weak, over the last couple of quarters. Residential investment, so total home building in the GDP report, was down in the fourth quarter of last year, down in the first quarter of this year. But we think we can attribute that to the big increase in mortgage rates that you saw in the middle of 2013. By our estimates, it takes about three to four quarters for changes in mortgage rates to work their way through the system, so it’s not so surprising that you had quite a bit of weakness there in the past couple of quarters. But we think that should probably be coming to an end at this point. And, we also think that there are some longer term fundamental forces that are helping us on the housing side. In particular, quite a bit of pent-up demand for household formation as a lot of people, younger people in particular, over the last few years have stayed with their parents. The share of 18-to-34 year olds that are living with their parents is at a very high level relative to where we were in the mid 2000s. And we think that some of that can gradually reverse.
ALLISON NATHAN: So what are the major risks to your view?
JAN HATZIUS: I think on the growth side the biggest risk is probably that the housing improvement that we’re building in does not materialize. There clearly are some factors that are weighing down on household formation that are more structural in nature. One is the high level of student debt, which is making it more difficult for many young people to form households of their own. One related to that, and probably reinforcing it, is the continued tight level of mortgage lending standards. So it’s possible that we’ll see less of an acceleration in that area. Even if housing does not come through with more growth, we still think that growth is going to be somewhat above trend, but of course that would take something away from the 3 percent, or maybe a little more than 3 percent, kind of pace that we’re looking for over the next year.
Economic Outlook: US Monetary Policy
Recorded on June 12, 2014
ALLISON NATHAN: Jan, as Goldman Sachs’ chief economist, you have been on the dovish side of consensus in terms of Fed policy. We’ve begun to see improvement in growth. How does this impact your Fed views?
JAN HATZIUS: At the margin, better growth, of course, means stronger employment growth, more rapid improvement in job market conditions, and eventually it’s also going to mean higher inflation. So directionally, a better economy will ultimately result in monetary tightening. But I think there are two points to keep in mind in thinking about this. One is that we have been expecting stronger growth, and the Federal Reserve has been expecting stronger growth, so to a large extent the improvement in the indicators that we now seem to be seeing is already incorporated in people’s forecasts for when the Fed may need to tighten monetary policy.
The second point to keep in mind is that monetary policy is not really so much about the growth rate of employment and the growth rate of output, but it’s really about the level of employment and the level of output relative to potential. And if you’re starting out from fairly deeply in the hole, as we certainly did back in 2009, then you can have a period of strong growth in employment, and strong growth in output, before you actually get to the economy’s potential. And only at that point would you really worry about significantly higher inflation and a significant case for more aggressive monetary tightening.
So our view on monetary policy is that the Federal Reserve is going to continue to taper quantitative easing. It’s going to continue to reduce the pace of purchases. We probably will see an end to the QE program by the fourth quarter of this year. But we still think it’s going to take a long time before the Fed’s going to actually push up the funds rate. And our current forecast for that is early 2016. I think the risks are, especially if we continue to see improvement on the growth side, that it comes a little earlier. But in general, we’re still comfortable, certainly, with the idea that it’s going to take a long time before we need to see monetary tightening. And I think the recent numbers have not changed that basic view.