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2020 Outlook: Q&A With Goldman Sachs' Chief Economist Jan Hatzius

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Behind the scenes at Goldman Sachs, thought-provoking insights are bubbling up each day. This space is for a few nuggets we think are worth sharing. From macroeconomics to the genome medicine revolution to the rise of digital gaming, these stories from around 200 West show you how top-level views can impact your life (and maybe even shape the way you think about money).

As Goldman Sachs’ chief economist and head of Global Economics and Market Research, Jan Hatzius oversees the development of the firm's macroeconomic outlooks each year (he’s helped pen them for the better part of his 20-plus years at Goldman Sachs). And the forecasting tends to make a splash among both institutional investors and the media. 

But what does Goldman Sachs’ Global Economic Outlook mean for consumers? 

We sat down with Hatzius shortly before the holidays to dive into some of the forecasts in the 2020 Outlook – from recession risk to improvements in the housing market – to better understand the macroeconomic impact on consumers. 

Q: Since publishing your year-ahead outlook, you’ve had a chance to share and discuss the report with clients and colleagues. What would you say has surprised people most about your forecasts?

A: I think people view it as fairly optimistic. We have seen over the last year and a half or so generally weaker economic data in the US, and even more so in many more places around the world. And our view is that the slowdown is coming to an end and 2020 will look somewhat better. I don’t think it’s going to be the same kind of rapid growth that we had earlier in the expansion – one that’s now lasted quite a while – but definitely would be on the more optimistic side of the consensus. 

Q: You’ve done some interesting work on recession risk probabilities in the past – particularly why the historical recession indicators aren’t as helpful signaling devices in today’s economy. Talk a little about that and what indicators you pay closest attention to and why they aren’t concerning you.

A: One indicator that has caused a concern among other forecasters and market participants is the slope of the yield curve – so the difference between long-term rates and short-term rates. When that is very low or negative, meaning short-term rates are higher than long-term rates, that’s often a negative signal about the future economy. And it’s true that historically, it’s got a pretty good track record in signaling future recessions.

But I think that changes that we’ve seen in the bond market over the decades make that indicator a little harder to interpret. In particular, the fact that market participants are just no longer nearly as worried about future inflation as they were 10, 20, 30 years ago means that long-term rates are structurally lower relative to short-term rates than they were in the past. In a world where you’re worried about inflation, you’re going to demand a pretty high premium for tying up your money for 10, 20, 30 years, and that means that you have a pretty steep yield curve. In the world we live in now, where people are just not as worried about inflation, that premium is much lower and that means a flatter yield curve.

Global Economic Outlook 2020: By the Numbers

A few key highlights from the firm's Global Economic Outlook, according to Goldman Sachs Research:

  • Global GDP growth is expected to rise moderately from 3.1% to 3.4% 
  • US GDP growth is forecasted at 2.3%
  • Strong household and private sector finances across most advanced economies should keep recession risk low – 20% in the US

Another indicator that historically has had a pretty good track record in forecasting recession is a low unemployment rate. That sounds a little counter-intuitive because you would think “low unemployment rate is a good thing, how can that be a signal of trouble?” In the past though, if you go to the more inflationary periods of say the 1970s or 1980s, very low unemployment rates have often meant that a significant burst of inflation was building, and then the Federal Reserve had to be pretty aggressive in tightening monetary policy – and that then pushed the economy into a recession.

Again, I think there have been some structural changes in the economy that make this indicator somewhat less concerning, and in particular inflation, for structural reasons, much more anchored. The Federal Reserve has more credibility in keeping inflation low and stable over time than before so that means that these inflation bursts are less likely.

Q: What are some additional impacts of a low unemployment rate that people might not necessarily be aware of?

A: For the most part low unemployment is a good thing – it’s relatively straightforward. You have a low unemployment rate, there are more job opportunities, wage growth is probably going to be better. In particular, lower-income workers – usually where job opportunities and wages vary most over the business cycle – will have better opportunities in a lower unemployment environment. So if you manage to have a low unemployment rate without excessive upward pressure on inflation, then it’s entirely a good thing. But if you have significant upward pressure on inflation that threatens to push [inflation] well above that 2% number the Fed is comfortable with, then it becomes a problem.

Q: You write your outlooks for the institutional investor, but it seems like there is plenty that consumers can take away from them, too. What would you highlight from the 2020 global outlook?

A: The strong labor market is very relevant for consumers. And whether that’s the low unemployment rate or somewhat stronger wage-growth numbers that we’ve seen in recent years that we think are going to continue – that would be an important observation. I think if you look at other labor market indicators that might not be the most high-profile indicators, they would be very consistent with the idea that we have a very strong labor market at the moment. For example, in the consumer confidence numbers, there’s a question on whether jobs are plentiful or hard to get, and we are at an almost record net percentage of people saying that jobs are plentiful. 

Another important aspect is the observation that if you look at the consumer part of the economy – retail sales and other consumer indicators – versus the business side of the economy (investments, equipment), the consumer side is doing significantly better. And consumer spending is growing more quickly than business investment, which has been contracting recently. This speaks to the fact that the business cycle has come a long way and the labor market has really improved. And that is starting to put more upward pressure on wages, which is good for consumers, but also can weigh on profit margins for businesses. 

We’re nearly 10 years into an economic expansion, and it’s actually remarkable how relatively subdued the increase in housing supply still is.

Housing is another important issue for consumers. There’s been a pretty sharp improvement in the housing indicators after a period of weakness; 2018 and early 2019 was a weaker period, partly on the back of higher mortgage rates. With mortgage rates having come down sharply in 2019, partly because of the expectation and then reality of Fed rate cuts, housing is now picking up pretty sharply.

And we are optimistic that it still has a way to run, partly because the interest rate environment is still very benign – long-term interest rates are still below 2% of the government bond market, mortgage rates are still quite low. And partly because housing activity is not at particularly high levels yet. We’re nearly 10 years into an economic expansion, and it’s actually remarkable how relatively subdued the increase in housing supply still is. So that means there isn’t so much available inventory in the housing market, but there’s still a fair amount of upside for building activity. 

Q: So does that explain the disconnect between businesses remaining hesitant to make investments and the strength of the consumer?

A: Well, another aspect is the trade war, which has been weighing, at times, prominently on business confidence. Businesses have to think about where they look to their production for example. Especially multi-national companies that might have some of their production facilities in Asia. If tariffs rise on imports from China, they might want to think about relocating their production from China to Vietnam, for example.

Whereas for consumers, the trade war has not really been a major issue so far. It could become one if the current signs of a truce [between the US and China] prove fleeting and we see additional escalation in 2020. Because if the US were to broaden the tariffs on imports from China to the remaining $150-$160 billion of imports, that would be very consumer-goods focused. And that would be very visible for the consumer. But our baseline expectation is that tariffs have peaked and the trade war will remain a sideshow from the consumer’s perspective.

Q: Should we be worried that the weakness we’re seeing on the business investment side could catch up to the economy?

A: It’s a very reasonable concern, because it’s natural to think about how the weaker parts of the economy could spread and engulf other areas that are stronger. However, when we look at the lead-lag pattern between business investment and consumer spending, historically, consumer spending has actually been a little more leading, and business investment has been a bit more lagging.

If we do get changes in interest rates, I think they’re more likely to be cuts than hikes.

That’s not a guarantee that it’s going to be true this time around, but it is consistent with our expectation that things on the business side are going to get a little better in 2020. Partly because of the trade war receding a little bit in the most recent phase one agreement between US and China. Assuming that that is actually finalized – it’s not quite finalized yet.

Q: Speaking more about the Fed – you aren’t expecting any rate hikes or cuts in 2020. What will that mean for US consumers?

A: If it’s right, I think it means that the interest rate environment for most of the consumer rates is probably going to be a little bit more stable than it has been over the last couple of years. We’ve seen a decent amount of volatility in interest rates over the last couple of years, much of which was due to the Fed moving from steady rate increases in 2017 to 2018, to rate cuts in 2019, which few people had anticipated. We certainly didn’t expect this – that we would move to rate cuts in 2019.

Now, however, we seem to be at the end of this easing phase. We’ve seen a pretty clear message from the Federal Reserve. For the time being, they think monetary policy is in a pretty good place and it would take a material reassessment of the economic outlook to cause any changes. If we do get changes in interest rates, I think they’re more likely to be cuts than hikes. At the moment, if you look at the inflation numbers – they’re below the Fed’s targets – it would take quite a lot to get them to hike, but it’s conceivable that they could cut.  If the economy doesn’t fulfill the expectations that we would have for 2020, if we see a significant disappointment, cuts are possible. But most likely, we think the interest rate market will be fairly low and stable. Long-term rates may be rising a bit. So if you look at fixed-rate mortgages, those rates might creep up in 2020, which I think is the most likely, but we’re not really looking for a sharp increase.

Q: To that end, how does the Fed’s pause affect monetary policy globally? 

A: Well, if the Fed is on hold, at least that doesn’t introduce much volatility into financial markets globally. Fed hikes, in particular, can be problematic for other central banks, especially in emerging markets. European interest rates, or Japanese interest rates, tend to be more independent in some ways from what happens in the US. Japan, for example, has been around zero for nearly 25 years, despite several tightening and easing campaigns in the US over that period.

And our view is that that slowdown is coming to an end and 2020 will look somewhat better.

But emerging markets are often quite concerned about their exchange rate, vis-a-vis the dollar – specifically the bilateral exchange rate. So when the Fed is hiking (that puts upward pressure on the dollar and downward pressure on emerging market currencies), central banks often feel they have to defend the value of their exchange rate and also hike rates, which sometimes may not be in the best domestic economic interest of the country. It’s really driven more by exchange rate considerations.

When there’s stability in the US it means no hikes, then generally central banks in Asia, Latin America, Eastern Europe, are in a better position. There are still probably some cuts that are going to occur in the various emerging markets, effectively piggybacking on what’s already happened in the US. Countries such as Mexico, Russia, South Africa, probably a few others, may still have some cutting to do. Otherwise, the monetary policy adjustments of 2019 is probably behind us. We don’t expect anything in Europe, Japan, the UK or Canada for most or all of 2020. 

Q: On a personal note, who are the people you most look forward to sharing your outlooks with each year, and what feedback have they given you? 

A: Of course, we share the outlook more broadly with clients of Goldman Sachs and the public, to the extent that we make some of our research publicly available.

In terms of conversations, the focus is on the large institutional clients. We spend a lot of time traveling, especially in the weeks after these outlook reports, seeing people, speaking at conferences, doing a lot of one-on-one meetings. And people who act on economic views and invest on the basis of their expectations for the economy and monetary policy are very engaged in that discussion. They will have a lot of input and feedback on our views, and often their views are quite different from ours, and that’s a very interesting discussion.

What’s been the feedback? People generally think we’re on the positive side of the consensus, so that means that the majority of people are somewhat more cautious. Most of our discussions have been defending a somewhat more positive view against maybe skeptics and naysayers.

Now, the data that we have seen in the months since the outlook reports have been reasonably positive. So that’s made our life a little bit easier. Certainly that doesn’t always happen. Sometimes you put out a big piece and the next few weeks of data basically calls for a stiff headwind of unpleasant numbers that are inconsistent with what you’re saying. But it’s early days and obviously what ultimately happens in 2020 we don’t know, and as always it will be exciting and interesting to find out. 

Q: You’ve been helping to pen economic outlooks for the better part of 20 years. What’s the most important thing you’ve learned about forecasting? 

A: That it is a combination of art and science. The science lies in the modeling skills that economists learn in graduate school and that our team applies to real world issues on a day-to-day basis. The art lies in choosing the right questions and combining the answers with experience from prior cycles and other, less quantifiable factors in setting the overall forecast. But the final point to remember is that predicting the future is simply hard because you are competing with a lot of smart people. Even if you have a good process and consistently do high-quality analysis, you will be wrong a decent share of the time. And if so, you need to acknowledge the error, make the necessary changes, and move on.

I feel that’s an area where the experience of having gone through some of these cycles a number of times is particularly valuable. I think a lot of the raw analysis and statistical methods and all the more high-powered, scientific things that we do – those you can probably learn at an earlier stage in your career. But I think the experience of seeing some of these cycles, combined with the more rigorous analytical skills that we have, can be very powerful.

This Q&A has been edited and condensed for clarity.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.