In a new research note, Goldman Sachs says its statistical model suggests the FOMC will likely project lower GDP growth and unemployment projections when the central bank releases updated economic forecasts next week.
We expect a substantial downgrade to the growth forecast for 2013. Real GDP grew just over 1.8% (annualized) in H1 and we are currently tracking Q3 GDP at 1.6%. While our own economic forecast implies Q4/Q4 growth of about 1.9%, we expect the SEP will show a more modest downgrade to about 2.2%. We also expect a small downward revision to 2014 and to the longer-run growth rate. The unemployment rate has fallen three-tenths to 7.3% since the June meeting. This is likely more than participants expected over this period, and we expect the 2013 forecast to fall to 7.1%, with similar declines in the following years.
As far as GDP goes, Goldman thinks the Fed will forecast 2.2% growth for this year (Q4/Q4), 3.0% for 2014, 3.1% for 2015, and 2.8% for 2016. As for unemployment, 7.1% at the end this year, 6.5% at year-end 2014, 5.9% at year-end 2015, and 5.7% at year-end 2016. The longer-run projections are for 2.3% GDP growth and a 5.5% unemployment rate.
1. As JPMorgan economist Mike Feroli recently pointed out, back in the 1990s the potential US growth rate was thought to be around 3.5% a year. Now the Fed may calculate it’s just 2.3% — and perhaps dropping. At least, the Fed isn’t yet as gloomy as JP Morgan itself: “The long-run growth potential of the US economy continues to slide lower, by our estimate, to around 1.75%; if realized this would be the lowest of the post-WWII era.”
2. The unemployment forecast also suggests Fed policymakers are making peace with the idea — as JP Morgan has also speculated — that the labor force participation rate isn’t going to bounce back in any major way. So, yes, the unemployment rate will continue to drop even as the employment rate remains depressed.
3. So there you have it: a) slow growth due to weak labor supply and productivity and b) a permanently larger pool of jobless Americans. Meanwhile, the central bank seems ready to begin tapering off its QE bond buys. And an interesting comment on that from Lars Christensen. He thinks market monetarists should abandon the idea of targeting the pre-recession NGDP trend — let bygones be bygones, as it were — and instead target of 4-5% NGDP growth from the present level of NGDP. The output gap is what it is. Christensen explains:
Just because I now argue that we should let bygones be bygones I certainly do not plan to let the Fed of the hook. Rather the opposite, but my concern is not that monetary policy is too tight in the US. My concern is that monetary policy still is far too discretionary. … If the Fed once again “slips” and let monetary conditions become excessively tight as in 2011/12 I would certainly scream about that. … My worries that Larry Summers might become the next Fed chairman certain have influenced my thinking about these issues. I don’t fear that Summers will be too hawkish or too dovish. I fear that we will go back to an ultra-discretionary monetary policy in the US. The result of this could be catastrophic.