Goldman Sachs On GDP Growth “Three Reasons to Keep the Faith”

Goldman Sachs On GDP Growth “Three Reasons to Keep the Faith”

With the underlying drivers of U.S. growth remaining mostly positive, Goldman Sachs analysts anticipate a rebound in GDP growth to 2.9% in Q2 and 3% in the second half of the year.

Jan Hatzius and team at Goldman Sachs in their May 1, 2015 research report titled: “US Economics Analyst – Three Reasons to Keep the Faith”, however, notes the Q1 GDP slowdown to just 0.2% (annualized) was worse than they had anticipated.

GDP growth: Positives should overweigh negatives in US

Hatzius et al. note the positive growth impetus from consumption and home-building should outweigh the drags from net exports and energy capital spending in the U.S. Citing the positives, the analysts note U.S. experiences solid labor income growth, above-equilibrium level of personal saving rate, medium-term upside in housing activity and easy domestic financial conditions. On the negatives front, the country has to grapple with some of the issues such as stronger dollar and the ongoing drop in energy capital spending. However, they conclude that their fundamental model of US growth implies that the positives should clearly outweigh.

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Besides the fundamentals, the Goldman Sachs analysts point to three statistical reasons to “keep the faith” in a growth rebound. First, they note the Q1 GDP weakness is at odds with other data as summarized by their current activity indicator(CAI), which showed 2.8% growth on a quarter-on-quarter annualized basis. As can be deduced from the following graph, the 2.6-point gap between the two measures is the biggest in the 1997-2015 history of the CAI:

Hatzius and colleagues note that historically large gaps of 1.5 points or more have on average been unwound entirely by a subsequent acceleration in GDP growth as opposed to a slowdown in the CAI.

Q1 has long been a funny quarter

The analysts also point out that the case for a rebound in GDP growth is strengthened if one considers the adverse weather conditions during much of the first quarter. As can be sen from the following graph, a simple regression of real GDP growth on the deviation of temperatures and snowfall intensity from the seasonal norm indicates that bad weather subtracted 1.25 percentage points from first-quarter growth:

Impact of weather in Q1 Real GDP Growth

The analysts point out if their estimate is correct, and if the impact unwinds in Q2, the weather swing in itself should result in a GDP acceleration of about 2.5 percentage points.

Substantiating with their third statistical reasoning, they note Q1 has long been a funny quarter. As set forth in the following graph, growth in the first quarter of each year from 2010 through 2014 has averaged 0.3%, compared with 3.0% in the second quarter:

Funny first quarter Real GDP Growth

Though some of this variation is due to the adverse weather in 2014 and 2015, the GS analysts point out that there is also evidence going back to the early 1990s that residual seasonality in several components of GDP has tended to weigh on Q1.

Hatzius et al. note their anticipation of stronger growth in the remainder of 2015 is a key reason why they continue to forecast that the FOMC will hike the funds rate at the September FOMC meeting. However, the Goldman Sachs analysts note September liftoff remains a close call, as it should be backed by a stronger output, employment growth besides more tangible signs that inflation will move back to 2%.

The following table summarizes Goldman Sachs’ U.S. economic and financial outlook:

US Economic and Financial Outlook Real GDP Growth

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