The big news over the weekend was Senator Manchin’s decision to oppose President Biden’s new fiscal package, which was expected to cost roughly $1.75 trillion. The economists at Goldman Sachs responded to this news by reducing their forecast of real economic growth in the first quarter of 2022 from 3% to 2%. Oddly, however, there doesn’t seem to have been any significant change in 10-year Treasury bond yields:
I see a couple of possibilities here:
- Perhaps Goldman Sachs is wrong in assuming that fiscal policy has a big impact on growth.
- Perhaps slower growth (both real and nominal) has no impact on long-term bond yields.
- Perhaps the market believes that Manchin will reconsider, and agree to support a slightly different package.
I am very skeptical of the second possibility, but am open to both the first and third options. Any thoughts?
READER COMMENTS
David Henderson
Dec 20 2021 at 3:07pm
I don’t think Goldman Sachs is wrong in assuming that fiscal policy has a big impact on growth, but I do think that Goldman Sachs got the sign wrong. I expect higher growth than if the bill had passed.
Ken P
Dec 20 2021 at 7:21pm
I agree, David. I would add that we should expect upward pressure on interest rates as debt level increases. The CBO estimated the cost at > $5 trillion. So upward pressure from debt and likely reduced growth.
Did the market figure out Manchin’s stance on Thursday?
Jose Pablo
Dec 21 2021 at 2:42pm
So, fiscal policy does have a great impact in growth but we jus’t don’t know if increases or decreases it?
Wow!
Mark Bahner
Dec 22 2021 at 7:42pm
It seems to me the answer would potentially depend on many things, such as:
What is the money being spent on (e.g. digging ditches with spoons, or repairing/replacing a major bridge that is likely to soon fail catastrophically)?
What is the existing relative federal debt load (e.g., as a percentage of GDP)?
What are the current economic conditions (e.g., near full employment, or massive unemployment)?
Are there any key “strings” attached (e.g., the work can only go to left-handed people over the age of 65)?
Jose Pablo
Dec 22 2021 at 8:33pm
But there should be just two possible scenarios:
a) the answer potentially depends on so many things, that the effect is totally unpredictable or
b) the answer depends on a limited number of variables that, as of today, have a value that can be measure with enough precision
If a) is the case, then, what GS is saying is just pure BS. If b) is the case then people informed of the right theory and with access to the same information on the “relevant inputs” should reach the same conclusion (the same way, for example, that people agree in the trajectory that a spaceship should follow to reach a moon orbiting Jupiter in a specific moment in time. Which also depends, by the way, in a bunch of different things)
Are we in case a) or case b)? Because I think that’s relevant for the discussion.
Jose Pablo
Dec 22 2021 at 8:40pm
“That’s relevant for the discussion” … and it is also relevant to figure out the amount of time that we should spend listening to economists.
Warren Buffett used to say that “if you have one economist in your pay-roll you have one too many”. Maybe he reached that oppinion after attending this kind of discussions.
Vivian Darkbloom
Dec 21 2021 at 3:05pm
What time frame are you referring to regarding “the impact on growth”? The Goldman Sachs estimate refers to the first three quarters of 2022 with the biggest drop in the first quarter. How plausible is it that the fiscal stimulus, even if there were any, would kick in as early as the first quarter of 2022 before any of those funds would have been spent? What is the mechanism by which the economy would grow in anticipation of additional fiscal spending? I find it mildly plausible that there could be an increase in growth in, say, the third quarter of 2022 (at the cost of later growth for an extended period of time) but I would like to hear Jan Hatzius explain how this bill, if passed tomorrow, would have increased growth in the three months following.
Vivian Darkbloom
Dec 21 2021 at 7:00pm
In partial answer to my own question, the part of the BBB plan that would potentially affect “growth” in the first three quarters would be the child care credit which is refundable and payable, at least in part, in advance. Failure to renew and expand this could reduce household spending; however, I doubt the effect would be as large as GS seems to assume.
Monte
Dec 22 2021 at 2:35am
He would argue that passage of BBB would increase consumer confidence and encourage people to immediately spend more, thus resulting in a first quarter increase in real economic growth, no? Pure Keynesianism. Interestingly, the Tax Foundation estimates almost a 0.5% decrease in long run economic growth if this bill were to pass.
I’m going to go out on a limb here and agree…
BTW, I love the Basil Rathbone “Sherlock Holmes” profile, of whom I’m a huge fan. The BBB dilemma is a classic Blue Carbuncle moment:
Watson: I can see nothing!
Holmes: On the contrary, Watson. You can see everything. You fail, however, to reason from what you see.
Alan Goldhammer
Dec 20 2021 at 3:24pm
Anyone offering a projection before waiting three weeks to see the full impact of Omicron is acting foolishly. I hope the South Africa data on morbidity holds up here but to get the granular data needed we will be in the second week of January at the earliest. If it does prove to be mild, David’s thought on higher growth will be realized otherwise we are in for another month of pain (market down 1.5% as I write this)
Michael Stack
Dec 20 2021 at 4:57pm
You make your best guess and you can’t really do any better. We might have a nuclear war in the next 3 weeks too – do we need to wait for that?There will always be unexpected changes that affect the economy. I agree with you that what we see with Omicron can have a major impact on the economy though.
Steven
Dec 20 2021 at 3:37pm
I think a fourth possibility is a large part of the explanation: any effects of the failure to reach a deal had already been priced into the market. (It’s been apparent for a few weeks now that a deal was unlikely.)
Henri Hein
Dec 20 2021 at 4:17pm
That’s what I thought as well. Isn’t that what EMH would predict?
vince
Dec 20 2021 at 4:01pm
Sorry if the list didn’t upload correctly. It looks like the built-in numbered bullets format is broken and was removed. Here’s another version:
1. universal free preschool
2. invest in child care
3. support workers who care for elderly
4. tax credits for shifting to clean energy
5. promote american steel for clean energy
6. invest in clean energy for disadvantaged communities
7. bolster resilience to climate change by investing in natural solutions.
8. reduce prescription drug costs
9. reduce aca insurance premiums
10. close medicaid coverage gap
11. expand medicare to cover hearing benefits
12. invest in affordable housing
13. extend earned income tax credit
14. expand access to college
15. promote nutrition security for children
16. invest in equity, safety and fairness
17. invest in immigration reform
18. pay for it all with higher taxes
vince
Dec 21 2021 at 6:50pm
Just clarifying my first post, which was lost in transit. Over the first 3 quarters of 2021, Goldman’s reduction was not as large, going from 3.2% to 2.6%. And the long list I posted was an itemization of a BBB advertisement. What in it truly looks like a boost to real GDP? Especially if it’s paid for by taxes. Last I looked, there was time shifting–deficits the first few years that were paid for, theoretically, later.
Scott Sumner
Dec 22 2021 at 2:03pm
“theoretically” is the key. Not in reality.
Michael Rulle
Dec 20 2021 at 4:03pm
1.Alan is properly cautious on Omicron—but each new bit of evidence appears to support the idea that it is less deadly–even adjusting for its likely higher cases.
2.The NFL this week must be evidence Omicron has hit town—-don’t know how many are symptomatic—-but I doubt anyone is seriously ill—we would have heard.
3.The NFL seems to have given its vote—-they have said they are changing their protocol—no more testing without symptoms (that means many are likely to slip by even with symptoms)—-so is that a sign if Omicron is a dud, businesses–and government– will not freak out–even with massively higher “cases”?
4.Agree with David’s point on government spending as inefficient—but how many new taxes were in this bill? I believe small—so even a multiplier of .8 could add short term growth—unless Government spending can actually be negative thru unintended consequences of what they spend it on.
5.Manchin is a mystery. Or put another way—-IF he were going to compromise later—this is exactly what he would do now—so I am with Scott on that—as in who knows what he will do?
6. Finally—Without looking it up—I challenge anyone to recall if Goldman is right more than wrong on it’s forecasts. They may be the best firm to work at—-and they might be the most influential in politics—-but their forecasts are as random as anyone reading this website.
Michael Rulle
Dec 20 2021 at 4:16pm
Allan is right to be cautious—but Omicron looks like a dud
So many NFL players out—Omicrom is coming to town—without symptoms
NFL has changed protocols to “business-friendly”—good sign
Government spending is inefficient—-but negative in short run? Maybe!
Manchin ultimately has to come to a compromise (or Dems to him) –or become Republican
Goldman is maybe the best firm on Wall Street—but their forecasts are no better than any reader of this website.
Thomas Lee Hutcheson
Dec 20 2021 at 5:50pm
Maybe GS figures that the failure makes a return of Republicans to power and larger deficits as they repeal taxes but do not reduce expenditures.
Mark Z
Dec 21 2021 at 5:16pm
Why wouldn’t the passage of the deficit-increasing BBB similarly deflate their growth expectations? Do only Republican deficits reduce growth? It also seems unlikely as an explanation since betting odds on the 2024 election don’t seem to have changed much in response to this news as far as I can tell.
Andrew
Dec 20 2021 at 8:34pm
Difficult to decide between “this was already priced in” and “to lowest order the government is just reallocating resources with fiscal policy so not likely to make much of a difference in short term growth.”
What would be interesting to see is if the traders at Goldman substantially changed their positions consistent with the analysis.
Jose Pablo
Dec 21 2021 at 5:02pm
I don’t think that even GS’ traders HAVE to follow GS’ analyst’s advice. In this “egg with bacon” dish, the traders are the pig and the analysts the hen. That’s a very different position!
Market Fiscalist
Dec 20 2021 at 10:07pm
Isn’t their a fourth possibility that the bond market just doesn’t care much what Goldman Sachs forecasts (or other unrelated factors outweighed its forecast’s influence)?
Mark Z
Dec 21 2021 at 5:17pm
Doesn’t that still leave us with the question of who’s wrong, Goldman Sachs or the bond market?
Jose Pablo
Dec 21 2021 at 5:33pm
GS being wrong means that the real economic growth in the first quarter of 2022 is not 2% (so, they are, very likely, wrong).
But what should happen for the “bond market” to be “wrong”?
Michael Rulle
Dec 21 2021 at 8:06am
This is hypothetical—-as the market likely has its own view apart from Goldman. But it seems like your logic on points 1 and 3 are in conflict with each other—-which I assume is not your intent.
If the market believes Goldman overstates the marginal impact of no spending bill, all else equal relative to their forecast, GDP will be higher than 2%——or, if there were a spending bill, all else equal relative to their forecast, GDP will be lower than 3%—-as they would have overstated their initial forecast if it factored in a Manchin yes vote. So, if Goldman’s way of thinking is perceived as overstating fiscal policy effects, the market’s marginal forecast of GDP based on Manchin’s vote should not matter (for argument’s sake assume GS overstates the effect of this bill by .5% )So, why would the market care at all about Manchin’s vote—-as the impact would be the same given point 1 (except for secondary and tertiary reasons, etc)? Since the “forecast effect” of the Treasury price is a given——and it seems you equate the effect of “1 and 3”——it appears both cannot be true.
Patrick Tehan
Dec 21 2021 at 3:48pm
What incentive does Goldman Sachs to be right in what they say? Is there any downside for public statements supporting Democrat policy preferences that turn out to be incorrect?
Steve
Dec 21 2021 at 3:58pm
Or GS is reducing next year’s GDP forecast but would revise the more distant future up (not that they actually project that far)? Isn’t stimulus sort of pulling future growth forward to today rather than generating new growth out of thin air?
rsm
Dec 21 2021 at 10:32pm
Perhaps GDP doesn’t measure anything but lies told on surveys by workers and businesses who don’t feel like finding the real figures or reporting them to the government?
Christophe Pella
Dec 23 2021 at 4:24pm
I’d say that the main reason is that we bond investors have been reassured by policymakers’ change of tone about inflation, leading to lower bond yields and lower break even inflation before this specific event. That’s close to saying that the bond market had predicted Sunday’s outcome: voters do not like the huge rise in the CPI. As politicians take note, the BBB was less likely to get the necessary votes.
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