Goldman's Jan Hatzius Believes the Hard Part Is Over

Episode Summary

Executive Summary: The episode examines whether the U.S. and global economy are heading for a soft landing after aggressive rate hikes. Goldman Sachs chief economist Jan Hatzius argues the hard part of disinflation is largely over, with inflation continuing to fall as labor markets rebalance without a recession. He sees the Fed able to wait before cutting, while monitoring labor data, consumer resilience, fiscal deficits, and longer-term productivity and AI effects.

Main Topics: Soft landing and the end of the inflation fight (Priority: 5/5): Hosts and Jan Hatzius discuss how optimism about a soft landing has become conventional wisdom, reversing earlier recession fears. Hatzius argues 2023 proved inflation can fall without a major labor-market collapse. Why disinflation should continue (Priority: 5/5): Hatzius says housing, wages, and goods inflation still have room to cool. He views these as lagged effects of prior tightening, making further inflation declines likely even without a recession. Labor market signals and recession indicators (Priority: 5/5): The conversation focuses on unemployment, job openings, claims, and payrolls. Hatzius downplays rigid recession rules like the Sahm rule, favoring a broader reading of labor data. Fed policy timing and rate cuts (Priority: 4/5): The guests debate monetary-policy lags and when cuts might begin. Hatzius thinks the Fed can hold longer because the biggest tightening impact has already passed and the labor market remains stable. Consumer strength and the role of real income (Priority: 4/5): Despite weak sentiment, consumer spending has stayed firm because real disposable income is rising, supported by wage gains, lower inflation, employment growth, and interest income. Fiscal deficits, crowding out, and macro risk (Priority: 3/5): Hatzius flags the large U.S. structural deficit as a future concern, though not an immediate crisis. He says higher debt-service costs could crowd out private investment if deficits remain elevated. Productivity, AI, and unusual features of this cycle (Priority: 3/5): The discussion closes on the possibility of productivity gains from AI, though not yet visible in the data. Both hosts emphasize how unusual this cycle has been, making simple historical rules less reliable.

Key Arguments: 2023 provided proof that inflation can be reduced without triggering a recession or severe labor-market damage. Further disinflation is expected from housing rents, wage normalization, and lingering goods disinflation. The maximum impact of the Fed's 2022 tightening on GDP growth likely occurred in late 2022/early 2023, so the worst growth effects may already be behind us. A rising unemployment rate is worth watching, but hard recession triggers like the Sahm rule should not be treated as automatic in a highly unusual cycle. Job openings declining is a healthy normalization from an overheated labor market, not necessarily a recession warning. The consumer remains supported by real income growth, making spending more durable than soft surveys suggest. The U.S. deficit is structurally large and could eventually crowd out private investment, but it is not near a crisis threshold now. AI may boost productivity later in the decade, but it is not yet visible in current productivity data.

Data Points: Core inflation in 2022 across affected economies: 6% - Average core inflation level across DM and EM economies that saw the inflation surge. Sequential annualized core inflation: about 3% - Hatzius says inflation has fallen to around this level without labor-market deterioration. Housing inflation / rent inflation: about 6% sequential annualized - Current housing-related inflation that Goldman expects to slow further. Expected rent inflation by end of next year: 3% to 4% - Forecast for rent and owners' equivalent rent deceleration. Weight of rent and owners' equivalent rent in core CPI: 40% - Shows why housing inflation matters for the inflation outlook. Weight of rent and owners' equivalent rent in core PCE: 17% - Shows contribution to the Fed's preferred inflation measure. Jobs-workers gap peak: 6 million - Maximum labor market imbalance during the post-pandemic overheating. Current jobs-workers gap: about 2 million to 3 million - Gap has narrowed as openings fell. Payroll growth over the past six months: 1.2 million - Used to argue labor market remains strong even as unemployment edges up. Real disposable personal income growth in 2023: about 4% - Key support for consumer spending. Expected real disposable income growth in 2024: about 3% or a little below - Still enough to support real consumer spending growth. Expected real consumer spending growth in 2024: about 2% - Goldman baseline for spending growth. U.S. federal deficit: 6% to 7% of GDP - Described as structurally large despite low unemployment. Current unemployment rate: 3.9% - Context for why the deficit is unusually large relative to a full-employment economy. 12-month recession probability a year ago: 35% - Goldman's prior estimate when inflation was higher and the Fed had less room to respond. 12-month recession probability now: 15% - Lower due in part to Fed ability to cut if needed. Current labor force / unemployment rule trigger distance: 0.33 to 0.35 percentage points - Transcript references the Sahm rule threshold area. Core PCE inflation in Q4 next year: 2.4% - Goldman's forecast for late-2024 inflation. Fed cut timing in baseline forecast: Fourth quarter of next year - Hatzius does not expect early cuts in the baseline scenario. Estimated productivity growth since Q4 2019: just under 1.5% annualized - Latest productivity trend cited as modestly better than pre-pandemic. Number of U.S. occupations analyzed for AI exposure: 900 occupations - Goldman’s AI task-exposure analysis using labor department classifications. Growth impact lag from monetary tightening: about two quarters - Hatzius' view of the lag between policy shock and maximum GDP growth impact.

Pivotal Quotes: "the hard part is over" — Jan Hatzius: Title of Goldman Sachs’ outlook, reflecting the view that disinflation can continue without recession. "we have a proof of concept that we can bring down inflation and rebalance the labor market without having to crush the economy and put the economy into a recession" — Jan Hatzius: Central argument for why 2023 changed the macro outlook. "if this cycle is very different from past cycles, maybe that historical fact is not as relevant as it would be under other circumstances" — Jan Hatzius: His caution about rigid recession rules like the Sahm rule in an unusual cycle.

Implications: Listeners should expect slower inflation and a later Fed pivot, not an imminent recession. The key watchpoint is labor-market deterioration; absent that, growth and consumer spending may stay resilient while deficits and productivity remain medium-term storylines.