- Goldman Sachs cut its US GDP growth outlook for 2022 and 2023, saying financial conditions are tighter.
- The bank's economists forecast US GDP will expand by 2.4% this year, down from an estimate of 2.6%.
- The Fed's rate hikes are in the ballpark of what's ultimately needed to cool wage and price pressures, they said.
Goldman Sachs has again lowered its forecast for US economic growth in 2022, to reflect tighter financial conditions as the Federal Reserve aggressively hikes interest rates.
The bank said Sunday it now expects US gross domestic product growth to grow by 2.4% for the year, compared with its prior estimate of 2.6%. Since December, when it predicted 3.8% growth, it has cut its outlook more than once.
Its economists said that since April, financial conditions have tightened to a level that should drag on GDP growth by about 1 percentage point, but also bring inflation down to the Fed's 2% target.
"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," economists at Goldman Sachs led by Jan Hatzius said in a note.
"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—and therefore see a growth downgrade as appropriate," they added.
Goldman also cut its US GDP outlook for 2023 to 1.6% growth, down from its previous forecast for a 2.2% expansion. The analysts said their assessment of the relationship between financial conditions and growth is approximate, given the uncertainties in the post-pandemic economy.
The Fed has the tricky task of trying to cool red-hot inflation without sending the US economy into a slowdown. It raised its benchmark rate by 0.5% in May for the first time in 22 years, bringing it to a range of 0.75% to 1%.
The central bank's aim is to have just enough job growth to keep the economy running well without contributing to rising inflation. Since 2020, job openings and core consumer price inflation have been strongly correlated.
Goldman noted that post-pandemic rises in US job openings were concentrated in industries that typically see employment fall when financial conditions tighten.
"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," the economists said.
The note, written by Joseph Briggs, predicted unemployment will rise to 3.5% at the end of 2022, and climb further to 3.7% at the end of 2023.
They added, however, that a sharp increase in unemployment may be avoided, "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."
The gap between labor demand and supply will likely narrow in the next year, now that labor supply disincentives from generous unemployment insurance packages fade out, they noted.
But the gap still remains "extremely high", and it can only be narrowed if the Fed convinces companies to lower job openings. This will in turn bring wage and price inflation to normal levels, they added.