Goldman: The Economy Is Growing "Very Rapidly" But That's As Good As It Gets

  • Written by Zero Hedge
  • Published in Economics

After another unexpectedly weak first quarter for US GDP (the 4th in a row), the US economy appears to have suddenly hit the nitrous as the unexpectedly strong Friday payrolls report showed, and from one forecast such as the Atlanta Fed which now sees GDP growing at 4.8%...

... to consensus Q2 GDP, which has surged by 50% over the past year, and is now at 3.1%...

... analysts and economists see another period of above-trend growth for the US economy, in large part thanks to the boost from the Trump fiscal stimulus which is slowly finding its way into the broader economy. Not even Goldman could hide its surprise at the strength of recent economic data, writing that the "Friday’s jobs and ISM numbers capped several weeks of firm US numbers that have taken our Q2 GDP tracking estimate to 3.7%... so the economy is back to a very rapid growth rate of roughly twice our 1¾% estimate of the underlying trend."

However, also according to Goldman, the streak of good news fo the economy is about to end as David Kostin explains below:

The current pace is probably as good as it gets because we expect the impulse from financial conditions to turn gradually more negative, based on the modest tightening in our index that has already occurred and the further likely FCI impact of our above-market funds rate forecast

Even so, Kostin believes that growth should remain well above trend as the fiscal impulse boosts both personal consumption and business fixed investment.  We therefore expect the jobless rate to fall to 3¼% by the end of 2019, 1¼pp below the FOMC’s current estimate of the longer-term sustainable rate. Goldman also notes that the biggest missing variable from the so-called expansion - wage growth - may finally be making a comerback:

our single favorite US wage measure—the employment cost index for private-sector wages and salaries excluding incentive-paid occupations—printed a sturdy 0.9% in Q1 on a seasonally adjusted basis.  When translated into annualized terms, both numbers are well above our estimate of the sustainable wage growth rate of 3-3¼%, though these high-frequency signals admittedly await broader confirmation.

However, aside from extrapolating trends, a bigger question in light of ongoing political developments, is how much growth will be impacted by the ongoing trade war. Here is Goldman's take:

The Trump administration’s recent trade-related announcements have taken us back to the environment of March/April, before Treasury Secretary Mnuchin declared the trade war “on hold.”  We wouldn’t take the latest announcements entirely at face value and regard them, in part, as an attempt to carve out a favorable negotiating position.  However, the administration is likely to implement at least some of them, as the threats otherwise risk losing credibility.  The measures could boost core PCE inflation by between 0.03pp and 0.15pp—depending on the extent to...

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