May 23, 2014
Issue No: 14/21
US Economics Analyst
Sticking with Stronger
We currently estimate that real GDP fell -0.7% (annualized) in the first quarter versus a December consensus estimate of +2½%. On the face of it, this is a large disappointment. It raises the question whether 2014 will be yet another year when initially high hopes for growth are ultimately dashed.
Today we therefore ask whether our forecast that 2014-2015 will show a meaningful pickup in growth relative to the first four years of the recovery is still on track. Our answer, broadly, is yes. Although the weak first quarter is likely to hold down real GDP for 2014 as a whole, the underlying trends in economic activity are still pointing to significant improvement.
From a “nowcasting” perspective, the extreme weakness in Q1 GDP contrasts with a much smaller downside surprise in our current activity indicator (CAI). In fact, the CAI has continued to accelerate on a year-on-year basis, from 1.7% in early 2013 to 2.6% now. We believe the CAI is a better measure of broad economic activity than GDP because it is more timely, more broadly based, less noisy, and less subject to revision.
The broader rationale for stronger growth in 2014-2015 also remains intact. The fiscal policy drag of 2013 has ended. The household sector debt/income ratio seems to have bottomed. And while we recently shaved our homebuilding numbers a bit, our forecast remains one of recovery. One reason is that a reversal of the “doubling up” of households should support stronger household formation in coming years.
An update of our financial balances model—which consists of equations for ex ante changes in the different components of the private sector financial balance (personal saving, net residential investment, and the corporate financing gap), the external balance, and the fiscal impulse—suggests that the net impulse from all sectors combined points to clearly above-trend growth in 2014-2015.
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The Goldman Sachs Group, Inc. Global Investment Research