US Economics Analyst
Adding Up the Growth Impulses: A Second Look (Briggs/Mericle)
In this week’s Analyst we update our estimates of the key growth impulses that drive our GDP forecast: reopening, fiscal stimulus, pent-up savings, easy financial conditions, and net trade. We then add up their combined impact to reassess the growth outlook and the risk of overheating.
Reopening is on track to deliver a large mid-year growth boost. The rebound in virus-exposed services has accelerated in recent months and has plenty of room to run, which should more than offset a normalization in demand for goods.
The fiscal impulse peaks in 2021Q2, partly due to the stimulus checks, and then declines substantially through next year. We incorporate our latest estimates of the upcoming infrastructure and social benefits package, and we now assume that the expanded eligibility and extended duration of unemployment benefits will expire in September, alongside the $300 weekly top-up.
We have made only modest changes to our estimates of the other key growth impulses. We use new spending and saving data to update our analysis of the impact of pent-up savings on spending, take on board the further easing in financial conditions to estimate the impact on growth, and use our latest forecasts of imports and exports to estimate the degree to which a wider trade deficit will help to absorb strong US demand.
Our analysis implies that the total impact of these key impulses will raise the level of GDP (relative to trend) by a further 3pp from 2021Q2 to the peak in 2022Q1. The total impact on the growth rate of GDP is peaking now in 2021Q2, remains strongly positive in Q3, begins to decline quickly in Q4, and turns negative by the middle of 2022, largely reflecting the reduction in fiscal support.
Our official GDP forecast follows the same pattern. We continue to forecast growth of 9.5% in 2021Q2 and 9% in 2021Q3, but have lowered 2021Q4 and 2022Q1 by 1pp each to 6% and 4%. This implies 2021 growth of +6.9% on a full-year basis or +7.7% on a Q4/Q4 (vs. +6.6%/+6.8% consensus) and 2022 growth of +4.7% on a full-year basis but just +2.6% on a Q4/Q4 (vs. +4%/+2.8% consensus). Our forecast implies a roughly 1.5% overshoot of our estimate of potential GDP, which we expect to push inflation moderately but not dramatically above 2% over 2022-2024, in line with the Fed’s goal.
Adding Up the Growth Impulses: A Second Look
The pace of recovery has accelerated in recent months as mass vaccination has sped up the reopening process and stimulus checks have boosted consumer spending. Our high-frequency consumer activity tracker now stands just over 2% above its pre-pandemic level, in line with its pre-pandemic trend (Exhibit 1, left), and real GDP is now at roughly its pre-pandemic level (Exhibit 1, right), implying a significant narrowing of the output gap since the stagnant winter, when the pandemic was at its worst.
Exhibit 1: A Faster Pace of Recovery in Recent Months Has Brought Consumption Back to Its Pre-Pandemic Trend and GDP Back to Roughly Its Pre-Pandemic Level
Source: Opportunity Insights, Second Measure, Department of Commerce, 1010data, IHS, Goldman Sachs Global Investment Research
The recent acceleration raises the question of where we go from here, and whether we might go too far.
When the debate about the risk of overheating kicked off in February, we published a series of reports that provided detailed estimates of the fiscal impulse in 2021 and beyond and the impact of pent-up savings on post-pandemic spending. We capped these with a summary report in which we combined these estimates with our earlier analyses of the impact of reopening, easy financial conditions, and net trade in order to add up the key growth impulses and assess the risk of a major overheating. This week’s Analyst updates our earlier estimates with the latest data and our latest fiscal assumptions.
Reopening
When we argued for a strong recovery of virus-sensitive services at the start of the year, we based our argument mostly on international experience from countries that had contained the virus and survey-based measures of consumer willingness to eventually return to those services. But over the last couple of months this service-sector rebound has become more than just conjecture as dining, air travel, and hotel stays have all begun to recover quickly, as reported in our US Economic Recovery Tracker. Exhibit 2 shows that all of the depressed service sectors have now recovered substantially from their pandemic lows, though in many there is still plenty of room for further progress over the next few months.
Exhibit 2: Covid-Depressed Services Are Bouncing Back But Have Plenty of Room to Recover Further
Source: Department of Commerce, Goldman Sachs Global Investment Research
Our forecast embeds a complete recovery in the service sector over the next few quarters as virus fears fade. A recent survey conducted by the Cleveland Fed, in which consumers reported plans to spend near or above pre-pandemic levels in even the most virus-exposed sectors, supports this expectation (Exhibit 3).
Exhibit 3: Consumers Increasingly Say They Plan to Return to Even the Most Virus-Exposed Activities
Source: Federal Reserve Bank of Cleveland
Further recovery in demand for services should more than offset a partial normalization of demand for goods. While some pullback from elevated current levels is likely, we expect demand for goods to remain above trend because household balance sheets are strong and pandemic-related preference shifts—such as the desire for more and larger homes, which has in turn created demand for goods such as furniture and appliances—should continue to support goods spending for some time.
Overall, the net effect of much stronger services spending and moderately softer goods spending should result in a robust further increase in consumer spending, as shown in Exhibit 4.
Exhibit 4: Rising Demand for Services Should More Than Offset Normalization of Demand for Goods
Source: Department of Commerce, Goldman Sachs Global Investment Research
To estimate the growth impulse specifically from reopening without double-counting the effects of other growth impulses discussed below such as fiscal stimulus or pent-up savings, we first remove fiscal support from our disposable income forecast and then compare consumer spending in a scenario where the saving rate remains at its elevated end-2020 level—reflecting the limited spending opportunities available during the pandemic—with spending in our baseline scenario in which consumption patterns normalize and the saving rate falls as the virus threat fades. We call the difference the reopening effect.
Fiscal Support
In February we first estimated the fiscal impulse using our forecasts for upcoming fiscal packages, a timeline for when the funds in both already-passed and upcoming packages would be spent or disbursed, and our estimates of the GDP impact of each type of spending or tax change, specified as quarterly paths that reflect the time lags in, for example, spending from stimulus checks. We later updated our estimates to incorporate the final details of the American Rescue Plan.
We have modestly revised our fiscal impulse to incorporate additional details of the proposed American Jobs Plan and American Families Plan. The White House budget proposal would raise spending by a total of $4.4 trillion over ten years (1.5% of GDP over that period) and increase tax revenues by $3.6 trillion (1.3%), but Congress will likely scale back many of these proposals. Our current fiscal forecast is for a package of slightly more than $3 trillion over 10 years, with tax increases of around half that amount, but we believe the risks lie modestly to the downside of those amounts. We also now expect the expanded eligibility and extended duration of unemployment benefits to expire in September, alongside the $300 weekly top-up.
Exhibit 5 shows our latest estimate of the fiscal impulse. It peaks now, in 2021Q2, largely due to the outsized impact of the stimulus checks and unemployment benefits, and then declines sharply through the end of next year.
Exhibit 5: The Fiscal Impulse Is Peaking Now, in 2021Q2, and Will Fade Sharply Through 2022
Source: Goldman Sachs Global Investment Research
Pent-Up Savings
Households accumulated nearly $2.5tn in excess or “forced” savings during the pandemic because many spending opportunities were unavailable. In our initial analysis of the impact of pent-up savings on post-pandemic spending, we noted that statistical models of consumer spending imply that households consume most of their current income but only a few cents per dollar of their wealth gains, and it is hard to know where in that interval the propensity to consume out of excess savings lies. To gain insight, we decomposed where the excess savings now sit into buckets defined by income quintile and the form in which the savings are now held (Exhibit 6). We then made assumptions about propensities to spend out of each bucket—say, a middle-income household’s savings in bank deposits—in order to estimate the share of total excess savings that will be spent. We arrived at an estimate that about 20% would be spent in the first year after full reopening.
We recently used new data on spending, saving, and bank account balances to update our earlier analysis. We now estimate that about 65% of the excess savings remain in bank deposit accounts, 25% have been invested in other longer-term investments, and 10% have been used to pay down debt. The high share remaining in bank deposits argues for a larger spending effect. However, we estimate that households in the top two income quintiles hold about two-thirds of the total excess savings, which argues for a smaller spending effect.
Overall, we think that our earlier estimate that about 20% of the excess savings will be spent in the first year after reopening still looks about right. While this estimate is more conservative than those offered by some commentators, it is larger than our estimate of the annual spend-down of excess savings after World War 2 and it is consistent with a recent Bank of Canada survey in which households estimated that they would spend one-third of their excess savings over the next two years.
Exhibit 6: A Large Share of Excess Savings Are Held in Bank Deposit Accounts, but They Are Skewed Toward Higher-Income Households
Source: Goldman Sachs Global Investment Research
We forecast the future evolution of the excess savings and the implied impact on consumer spending by iteratively applying the spending propensity from each income group/asset-class bucket and allowing for some additional steady outflow from bank deposit accounts to other less liquid assets (Exhibit 7). To avoid double-counting and to account for interactions with the other key growth impulses—for example, households are unlikely to spend excess savings in a quarter in which they also receive a large stimulus check— we calculate the spending impact by using a scaled-down estimate of excess savings that subtracts spending from government income support, and we adjust the quarterly path of the spending impact to assume that less is spent out of excess savings in quarters in which disposable income is high.
Exhibit 7: Spending of Pent-Up Savings Should Provide a Large, Sustained Boost to Consumption
Source: Goldman Sachs Global Investment Research
Easy Financial Conditions
Financial conditions have eased even further in recent months, taking our GS Financial Conditions Index (FCI) to its easiest level on record. We use our FCI growth impulse included in our weekly US economic indicators update to estimate the GDP impact of the latest changes, but we water down the implied effects moderately to account for the fact that recent changes in financial conditions reflected expected changes in economic outcomes rather than changes in monetary policy or risk sentiment to a greater degree than usual over the last couple quarters, as the effectiveness of vaccines in fighting the pandemic and clearing the way for recovery became apparent.
Exhibit 8: Further Easing in Financial Conditions Should Continue to Boost Growth in Coming Quarters
Source: Goldman Sachs Global Investment Research
International Trade
International trade has already begun to act as a partial shock absorber, with strong US demand raising imports much more than exports have rebounded. We expect this to continue this quarter and next as US demand remains especially strong and foreign demand for US exports takes a bit longer to recover (Exhibit 9, left). This further widening of the trade deficit in the near term (Exhibit 9, right) should help to relieve some of the pressure on domestic supply. As the impact of fiscal stimulus on US demand begins to fade and trading partners on a slightly later vaccination and recovery timeline catch up, we expect an improvement in the balance of trade to support growth at the end of this year and beyond.
Exhibit 9: The Widening of the Trade Deficit Helps to Partially Absorb US Demand at Its Peak
Source: Department of Commerce, Goldman Sachs Global Investment Research
Adding Up the Growth Impulses
We conclude by adding up the five key growth impulses discussed above. Exhibit 10 shows our estimate of the combined direct effect of the growth impulses on the level of GDP. We have estimated the incremental effects of the impulses in the order listed above, and a different ordering would allocate the total GDP boost somewhat differently among the impulses. We also caution that the impulses shown are not meant to be an exhaustive list of all of the factors informing our GDP forecast, and that they are exclusive of trend growth of potential GDP, which we estimate at about 1.75% per year.
Our analysis implies that the total impact of these key impulses will raise the level of GDP by about 3pp (relative to trend) from 2021Q2 to the peak in 2022Q1. Thereafter, the combined impulse declines as fiscal support fades.
Exhibit 10: The Combined Impact of the Key Growth Impulses Raises the Level of GDP by a Further 3% (Relative to Trend) from 2021Q2 to 2022Q1
Source: Goldman Sachs Global Investment Research
Exhibit 11 shows the same information as Exhibit 10, but as contributions to quarterly annualized GDP growth. The total boost to GDP growth peaks in Q2 at 8pp, with the largest contributions coming from reopening and fiscal stimulus. Continued reopening and spending from excess savings support growth in the second half of this year. The impact of the impulses on sequential growth then fades quickly and turns negative by mid-2022 because much of the fiscal stimulus is one-off in nature.
Exhibit 11: The Boost to Quarterly Annualized Growth Peaks in 2021Q2 but Turns Negative by Mid-2022
Source: Goldman Sachs Global Investment Research
The combined direct impact of the growth impulses shown above does not reflect every factor that informs our official GDP forecast, which comes from a component-level model. But adding the impulses above to potential growth and accounting for moderate second-round effects would give a pattern that is broadly similar to our official GDP forecast shown in Exhibit 12.
We continue to forecast growth of 9.5% in 2021Q2 and 9% in 2021Q3, but have lowered our forecasts for 2021Q4 to 6% and 2022Q1 to 4% (by 1pp each), in part reflecting our revised assumption that all of the extra unemployment benefit provisions will expire in September. Our new numbers imply 2021 growth of +6.9% on a full-year basis (vs. +6.6% consensus) or +7.7% on a Q4/Q4 (vs. +6.8% consensus). However, we expect a sharp sequential deceleration in 2022 that would leave GDP growth at +4.7% on a full-year basis (vs. +4% consensus) but just +2.6% on a Q4/Q4 basis (vs. +2.8% consensus), with the stronger full-year average number boosted by very strong growth over the course of 2021.
Exhibit 12: We Expect Very Strong Growth in 2021, but a Sharp Sequential Deceleration in 2022
Source: Goldman Sachs Global Investment Research, Bloomberg
Our GDP growth forecast, coupled with our larger output gap estimate, implies a roughly 1.5% overshoot of our estimate of potential GDP, as shown in Exhibit 13. Our unemployment-based output gap estimate is somewhat smaller. These estimates are the main reason that we are less concerned about the risk of persistent overheating than some other commentators. But the uncertainty is high. The US economy has not reopened from a major pandemic in 100 years and has not seen a comparable episode of massive pent-up savings in 75 years, which makes economic forecasting harder than usual.
Exhibit 13: Our Forecast Implies a Roughly 1.5% Overshoot of Our Estimate of Potential GDP
Source: Goldman Sachs Global Investment Research
We expect this moderate but not dramatic overshoot of potential GDP to result in a moderate but not dramatic overshoot of the peak inflation rates seen last cycle. Once the current inflation surge driven by reopening effects and production bottlenecks subsides, we expect core PCE inflation to settle at 2.1-2.2% over 2022-2024, in line with the Fed’s goal under its new monetary policy framework.
Joseph Briggs
David Mericle
The US Economic and Financial Outlook
Forecast Changes
We have lowered 2021Q4 and 2022Q1 GDP growth by 1pp each.
Source: Goldman Sachs Global Investment Research
Economic Releases
Source: Goldman Sachs Global Investment Research, Bloomberg
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