Jan Hatzius Does 10 Questions and Answers for 2013

Good catch here from Bill McBride at Calculated Risk.  Jan Hatzius does 10 for 2013:

1.Will the 2013 tax hike tip the economy back into recession?

No. To be sure, it will likely deal a heavy blow to household finances, and we therefore expect consumer spending to be weak this year. …

2.Will growth pick up in the second half?

Yes. This forecast is based on the assumption that the drag from fiscal retrenchment—i.e., the ex ante reduction in the government deficit—diminishes in the second half of 2013 but the boost from the ex ante reduction in the private sector financial balance remains large. In our forecast, this causes a pickup in real GDP growth to a 2½% annualized rate in 2013H2, and further to around 3% in 2014.

3.Will capital spending growth accelerate?

Yes. We expect a pickup from around zero in the second half of 2012 to about 6% in 2013 on a Q4/Q4 basis. This would contribute 0.6 percentage points to real GDP growth and offset most of the likely slowdown in consumer spending growth.

4.Will the housing market continue to recover?

Yes. The fundamentals for housing activity point to further large gains in the next couple of years.

6.Are profit margins bound to shrink in 2013?

No.

7.Will core inflation accelerate significantly?

No. We expect inflation as measured by the PCE price index excluding food and energy to stay around 1½%, moderately below the Fed’s 2% target.

8.Will there be a bond market scare over the budget deficit?

No. … the large government deficits of the past five years are closely related to the dramatic balance sheet adjustment in the private sector. … As the private sector balance sheet adjustment comes closer to completion, we expect the government deficit to diminish gradually … By 2015, we expect the federal deficit to be down to $500bn, or just under 3% of GDP. If this forecast is correct, concerns about the federal deficit are likely to diminish over the next few years.

9.Will the Federal Reserve stop buying assets?

No. Admittedly, the minutes of the December 11-12 FOMC meeting suggest that most Fed officials currently expect QE3 to end by late 2013. But we would not make too much of this. For one thing, it is important to remember that the outlook for monetary policy depends on the outlook for the economy.

10.Will interest rates rise?

Not much. … At the longer end of the curve, we do expect a small increase in 10-year Treasury yields to 2.2% by the end of 2013.
Read more at http://www.calculatedriskblog.com/2013/01/goldmans-hatzius-10-questions-for-2013.html#llvKq1b3KVsA0gbW.99

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. “1.Will the 2013 tax hike tip the economy back into recession?
    No. To be sure, it will likely deal a heavy blow to household finances, and we therefore expect consumer spending to be weak this year.”

    Which tax hike are they referring to – the payroll tax hike, the Obamacare taxes that are going to take effect in 2013 and on into 2014? Maryland hit taxpayers with higher taxes just last year, and are looking for more.

    • I think Jan is referring to all the recent Federal tax hikes combined that were in the Fiscal Cliff deal: payroll tax + 2% plus the increase to 39.6% on earners over $400K, the cap gains & div increse to 23.8% which includes the Obamacare 3.8%.

  2. “2.Will growth pick up in the second half?
    … but the boost from the ex ante reduction in the private sector financial balance remains large. In our forecast, this causes a pickup in real GDP growth to a 2½% annualized rate in 2013H2″

    A bit confused by this, as there has been no (up/down) trend in private saving and gross investment the last 3 quarters? He must be seeing some trends in other indicators that are not apparent. Also, why the “pickup” to 2.5% real GDP, it’s currently at 2.5%?

  3. Jan Hatzius is a very smart economist. But his employer, the giant squid aka Goldman, wants him to suck us into the risk assets they are selling. This Q & A is too glib, too optimistic, too complacent, and he sounds oh so sure of himself. At least here, there are no caveats and no mentions of the risks that might cause this forecast to change.

    • Boston Larry – Does Goldman not do any fixed income trading? No hedge-related derivatives? They only sell equities and “risk assets?”

      I can understand skepticism of Goldman Sachs or any Wall Street firm, but that analysis strikes me as grossly oversimplified at best.

  4. “8.Will there be a bond market scare over the budget deficit?

    No. … the large government deficits of the past five years are closely related to the dramatic balance sheet adjustment in the private sector. … As the private sector balance sheet adjustment comes closer to completion, we expect the government deficit to diminish gradually … By 2015, we expect the federal deficit to be down to $500bn, or just under 3% of GDP. If this forecast is correct, concerns about the federal deficit are likely to diminish over the next few years.”

    Can you elaborate on what exactly the private balance sheet adjustment here was? I get that it all comes down to the sectoral balances breakdown, but what exactly was the driver here?

  5. Hey Cullen,

    Got to listen to a really presentation from a big shot Hedge Fund manager. The US personal wealth rose by about $5 trillion dollars last year and from their data traditionally US citizens have spent about 5% of the wealth gain from the previous year. So they are expecting $250 billion in additional consumer spending this year that will offset the tax hikes that have been implemented. Only time will tell!

    • From data I have seen, most of that rise in wealth has been related to the rally in the stock market. $5Trillion seems way excessive, but it may well be. In any event, this raise in wealth would be highly concentrated or stuck in accounts like pensions and 401k funds where it cannot be easily spent. Furthermore, there have been no gains from real wages and incomes, not to mention the huge increase in US debt and people on food stamps and other government entitlements.

      I think it is very dangerous to assume that we will simply be “growing” our way out of this massive credit-induced crisis.

  6. It may very well tuen out to be 10/10 but kee in the back of your mind. It rimes too perfectly to be the realized outcome.

  7. For those interested, here is Hatzius’ outlook for 2011 and 2012. I encourage you to go back and check his expectations against results and then draw an educated opinion (you may still think he’s a shill for the Evil Squid).

    http://www.goldmansachs.com/our-thinking/topics/global-economic-outlook/outlook-2011/index.html

    http://www.goldmansachs.com/our-thinking/topics/global-economic-outlook/outlook-2012/index.html

    Also, keep in mind – paraphrasing Cullen – predicting with accuracy a quarter out is hard. Doing it a year or more is damn hard.