Interview with Goldman’s Jan Hatzius

Episode Summary

Executive Summary: Jan Hatzius argues the U.S. economy should slow but avoid recession, with fiscal policy, Europe’s slowdown, and the Fed’s response as the main variables. He sees payroll-tax and unemployment-benefit extensions as crucial, expects some extra QE and clearer Fed guidance, and supports nominal GDP targeting as a better way to restore growth and employment.

Main Topics: Fiscal policy and early-year growth (Priority: 5/5): Hatzius says the fate of the payroll tax cut and unemployment benefits is a major determinant of near-term U.S. growth, with lapses posing meaningful downside risk. Europe’s spillover into the U.S. economy (Priority: 5/5): He breaks Europe’s impact into trade, financial conditions, and banking linkages, with the banking channel seen as the most important for U.S. GDP. Federal Reserve policy options (Priority: 5/5): Hatzius expects the Fed to publish rate-path projections, clarify its inflation target language, and eventually add more QE, likely through mortgage purchases. Nominal GDP targeting debate (Priority: 5/5): He makes the case that an NGDP level target could help close the post-crisis output gap faster than current policy, while addressing common inflation objections. Housing market outlook (Priority: 4/5): He expects housing price declines to end around 2012, with multifamily construction already improving while single-family recovery remains slow. Consumer deleveraging and saving behavior (Priority: 3/5): Hatzius says households still have more deleveraging to do, but the adjustment is increasingly showing up in spending and income flows rather than sharply higher saving. Corporate profits, investment, and rebalancing (Priority: 4/5): He attributes strong profits to weak labor costs and still-slack demand, while noting investment remains muted because capacity utilization is low and the economy needs more export-led growth.

Key Arguments: Fiscal policy is a near-term growth risk: if the payroll tax cut lapses, the hit could be significant because it removes about $110 billion of disposable income. The U.S. is not headed for recession in his base case, but growth should slow in the first half of the year due partly to fiscal tightening and external weakness. Europe affects the U.S. through exports, market conditions, and bank linkages; the banking channel could shave three to four tenths off GDP growth. The Fed is likely to improve communication and eventually do more QE, but a nominal GDP level target would be a more effective way to restore the economy to pre-crisis trends. NGDP targeting does not necessarily require high inflation; much of the adjustment could come through real growth, and it has a clearer exit path than simply raising the inflation target. Housing overvaluation has largely unwound, so the market is nearing the end of the decline even though excess supply means further short-term weakness remains. Corporate profits have been strong mainly because wage growth and unit labor costs have been weak; investment is recovering only slowly because utilization remains low. A meaningful U.S. recovery still depends on global rebalancing toward exports and tradable sectors rather than relying mainly on housing or consumer demand.

Data Points: U.S. exports to Euro area: About 2% of U.S. GDP - Used to argue the direct trade hit from Europe is limited. Potential fiscal downside from payroll tax lapse: About $110 billion of disposable income - Hatzius says expiration could cut growth significantly. Possible growth hit from payroll tax lapse: Half a percentage point or more - Estimated downside from losing the payroll tax cut. Europe banking-channel effect on GDP: Three or four tenths off GDP growth - Estimated U.S. growth drag from European bank deleveraging and asset holdings. Impact of tighter financial conditions: Quarter to half a point from GDP growth - Estimate from lower stocks and stronger dollar due to Europe. Expected fourth-quarter growth: About 3% annualized - Current pace at the time of the interview. Expected first-half growth: Roughly 1% - Hatzius’s forecast for early next year. Housing overvaluation at peak: Over 30% - Extent of the housing bubble in his model. Expected home price declines: 2% to 3% in 2012 - Further decline before housing bottoms. Current saving rate range: 3% to 5% - Expected household saving behavior during deleveraging. Current current-account deficit: Over 3% of GDP - Shows need for export-led rebalancing. Peak current-account deficit: About 2005-2006 peak; now roughly half as large - Current deficit is smaller than the pre-crisis maximum.

Pivotal Quotes: "If the payroll tax cut were to lapse as well, that would mean some additional downside." — Jan Hatzius: On fiscal policy risks to early-year U.S. growth "I think it can get you back to the dual mandate inflation and unemployment more quickly than the policy they're pursuing now." — Jan Hatzius: On why nominal GDP targeting could outperform current Fed policy "There's a very good chance, I think, still that the unemployment benefits are going to be extended as well." — Jan Hatzius: On expectations for fiscal extensions

Implications: Listeners should expect slower but still positive U.S. growth, with policy choices in Washington and at the Fed likely to matter more than usual. Hatzius’s view favors more accommodation, especially NGDP targeting, while export-led rebalancing and housing stabilization remain key to a durable recovery.