DID YOU KNOW? Goldman Sachs' crystal ball sees the following in the US economic future:
- Fed Chairman Powell is celebrating “extraordinary economic times” in the US in 2018: growth is on pace to exceed 3%, unemployment is at a 48-year low, and inflation is right on target.
- Growth is likely to slow in 2019, from a recent pace of approximately 3.5% to about 1.75% by the end of 2019.
- Tighter financial conditions and fading fiscal stimulus should be the key drivers of the deceleration. Robust job creation should push the unemployment rate to 3% by early 2020, well below the 4½% estimate of full employment, the rate consistent with 2% inflation.
- Wage growth should reach 3.25-3.5% in this environment, and firmer wage pressures coupled with additional tariffs should boost core PCE inflation to 2.25% by the end-2019 of, possibly higher.
- The Fed is very likely to raise rates in December. Four more hikes are expected in 2019 to bring the terminal funds rate to 3¼-3½%.
- Large labor market overshoots raise recession risk down the road. While Goldman takes this lesson seriously, they think it's being applied too mechanically in markets today. A flatter and more anchored Phillips curve should allow the Fed to unwind the overshoot more gradually, giving it a good chance of beating the historical odds.
- For now, neither overheating risks nor financial imbalances - the classic causes of US recessions - look worrisome.