Overview US Economics Analyst From Goldman Sachs Last week we revised down our US growth forecast to incorporate larger negative s...

Economists Worldwide Cut Outlook On Growth



Overview
US Economics Analyst From Goldman Sachs

Last week we revised down our US growth forecast to incorporate larger negative spillover effects from the slowdown in China caused by the coronavirus. Our previous estimate accounted for three channels of impact: a hit to US goods exports to China, a decline in tourist arrivals from China, and modest supply chain disruptions affecting US retailers.

Over the last week the situation has proven worse than we expected in two respects. First, economic activity in China has remained even weaker than we had anticipated, and our China Economics team cut its forecast for Q1 GDP growth sharply. Second, it has become clear that the new coronavirus is especially infectious as outbreaks have occurred in many additional countries, including the first reported cases of community spread in the US.

We are therefore revising down our US growth forecasts further to incorporate a hit to GDP from two additional channels. First, we now account for supply chain disruptions affecting US producers. While shortages of intermediate goods should remain modest in the US if Chinese production continues to recover, some US producers are likely to exhaust their inventories.

Second, we now account for direct effects of US outbreaks on consumer spending. This channel is highly uncertain because it depends on the extent and duration of any outbreaks and how strongly businesses and consumers pull back from normal economic activity. To estimate the magnitude, we combine a top-down estimate of GDP changes during past pandemics with a bottom-up estimate of potential declines in the categories of consumption likely to be hit hardest.

Accounting for these additional effects, we now forecast US growth of 0.9% in Q1, 0% in Q2, 1% in Q3, and 2.25% in Q4, with the virus shaving about 1pp off of Q4/Q4 growth in 2020. While the US economy avoids recession in our baseline forecast, the downside risks have clearly grown.

Following a statement from Chair Powell on Friday afternoon, a Fed cut in March appears nearly certain. We have made a further adjustment to our Fed call and now project a 50bp rate cut by March 18 followed by another 50bp of easing in Q2, which we are penciling in as 25bp cuts in April and June, for a total of 100bp.

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