January 6, 2020
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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.
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.
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.
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.
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