Wall Street, Fed Too Optimistic On US Economy, One Bank Says

The apparent demise of Build Back Better will deal a blow to an already waning US fiscal impulse and the world’s largest economy won’t live up to expectations next year.

Those are two key takeaways from the 2022 vintage of Goldman’s “10 Questions” year-ahead outlook piece, an annual tradition presented in Q&A format.

The potential economic ramifications of Joe Manchin’s decision not to back The White House’s social spending plan have yet to set in for many market participants, likely because negotiations are ongoing. The administration insists the legislation isn’t dead. And even if Manchin is intent on killing it as a package, there’s still hope of passing it in piecemeal fashion.

Nevertheless, the expiration of the expanded child tax credit is a big deal and extending the moratorium on student loan repayments is wholly insufficient when it comes to papering over this particular split between Manchin and his fellow Democrats.

“Even if a compromise is reached, it looks unlikely to come in time to support consumer spending in Q1,” Goldman’s David Mericle and Alec Phillips wrote, adding that “the mid-January child tax credit payment looks very unlikely at this point, and it seems unlikely that a deal, if one was reached, would happen in time to allow the Treasury to make the February or March payments.”

As detailed somewhat extensively in the linked article (above), that reality could represent a significant blow to the American consumer.

Although Goldman does expect inventory restocking, pent-up savings and the vaunted “wealth effect” (figures below) to bolster growth, an expected sharp drop-off in fiscal support means consensus is currently too optimistic for 2022, the bank warned.

“We estimate that the boost to the level of GDP from the various pandemic fiscal packages peaked at just under 8% in Q2 2021, and has now fallen to just under 6%,” Mericle and Phillips went on to say, before projecting a decline to somewhere between 1.5% and 2% by the fourth quarter of next year.

The figure on the left (below) shows you the granular breakdown. On the right are Goldman’s projections, alongside consensus and forecasts from the December SEP.

The read-through is obvious. In Goldman’s estimation, both analysts and the Fed are too optimistic.

“Consensus expects GDP growth of 3.4% in 2022 on a Q4/Q4 basis, and the median FOMC participant expects 4.0%,” the bank remarked, cautioning that their own forecasts are considerably lower.

“The deceleration is likely to be sharpest in Q1, when the Omicron variant will likely weigh on service sector spending and labor supply, and it may also worsen global supply chain disruptions,” Mericle and Phillips said. “For 2022 as a whole, the main headwind is the large fiscal pullback.”

Build Back Better Slower.