‘Drags From The War’: Goldman Slashes US Growth Outlook

The war in Ukraine will weigh on the US economy this year, increasing the odds of a recession.

That’s according to Goldman, which now sees below-trend growth both for Q1 and Q2, as higher prices dent consumer spending and geopolitical headlines undermine already fragile sentiment.

“Combining our commodity strategists’ forecasts with estimates of pass-through to consumers, we estimate that rising gas and food prices will create an effective 0.7pp drag on real disposable personal income in 2022 with larger drags for lower-income households whose spending is typically more sensitive to fluctuations in income,” the bank’s Joseph Briggs said, in a new note.

Recall that real disposable personal income was already set to fall below the pre-pandemic trend thanks in no small part to the demise of Build Back Better, and particularly the expiration of the revamped Child Tax Credit. The surge in commodities is thus insult to injury for households which spend a larger percentage of their earnings on energy and food (figure below).

While savings buffers accumulated during the pandemic may help offset some of the shock, those cushions were already dwindling in the face of the hottest inflation in four decades. February’s CPI report suggested price pressures continued to broaden out even before Russia invaded Ukraine. The situation is likely to get materially worse due to the war, or at least in related categories.

On top of the hit to spending from rising commodity prices, Briggs noted that consumer sentiment usually suffers during geopolitical crises. The bank cited new polls from MorningConsult and Ipsos which “show a clear decline in consumer confidence since Russia invaded” its neighbor.

The preliminary read on University of Michigan sentiment, out Friday, was dour. “The greatest source of uncertainty is undoubtedly inflation and the potential impact of the Russian invasion of Ukraine,” Richard Curtin, chief economist for the Michigan survey, remarked. Almost one in four respondents spontaneously mentioned the Ukraine invasion when responding to questions about the economic outlook.

Goldman’s Briggs also cited “modest” spillover from Europe. “We previously estimated that a 1pp decline in export-weighted global growth is associated with a 2pp decline in US export growth, and multiplying by the Euro area’s share of US exports (21%) and the export share of US GDP (11%) implies that each 1pp drag on Euro area growth reduces US growth by about 5bp,” he wrote, before warning that financial conditions might also tighten if the conflict persists.

Ultimately, Goldman now sees real GDP growth of +0.5%/+1.5%/+2.5%/+2.5% in 2022Q1-Q4 compared to +1.0%/+2.5%/+2.5%/+2.0% previously. The bank cut its 2022 growth forecast to +2.9% on an annual basis, down from +3.1% previously, and +1.75% on a Q4/Q4 basis from 2.0%.

If that seems optimistic to you, note that Goldman is fully aware that things could get materially worse, depending on how things play out. “Even after these downgrades, we still see risks around our growth forecast as skewed to the downside, particularly if sanctions escalate or if oil prices rise even further, for example, to the $175/bbl price target our commodity strategists see as possible if supply losses reach 4mb/d,” Briggs went on to say, adding that although “only a small share of US commodity demand is met by Russian exports… supply chain disruptions [could] lead to challenges in sourcing key metals and other inputs that constrain production,” a scenario which could entail a “more substantial” impact on US GDP.

All of this as the Fed begins what’s (still) expected to be a relatively aggressive tightening cycle. The odds of a recession, Goldman said, are between 20-35%.