(Bloomberg) - US consumers beset by inflation are already relying on leverage to some extent to fund their spending, according to Goldman Sachs Group Inc.’s chief economist, Jan Hatzius.
“Borrowing is going to be a short-term driver of spending, and I think has been to some degree” already, Hatzius said on Bloomberg Television Tuesday. “Consumer spending is going to be relatively slow. Income is going to be quite weak in 2022.”
He said consumer credit is on the rise, and there has been a pickup in mortgage-equity withdrawal, where homeowners take out a loan against the appreciated equity in their property. Hatzius observed that both dynamics are supporting spending.
The remarks contrast with the view of some economists who see bloated stockpiles of savings, thanks especially to government transfers during the pandemic, as a major pillar of support for consumer demand.
Goldman economists have slashed their projections for US growth, and now see only a 1.25% gain in gross domestic product in the fourth quarter of 2022 compared with the same period of 2021.
They see an expansion of 1.5% for 2023, again using the fourth-quarter on fourth-quarter comparison. That’s below the trend rate of expansion for the US.
Hard Landing
Domestic demand will largely drive the US slowdown, Hatzius said. “Higher interest rates, lower stock prices, somewhat wider credit spreads and to some degree” a stronger dollar will all impinge on demand, he said.
Goldman for now is sticking with its call that the Federal Reserve will raise its benchmark rate to a 3%-to-3.25% range.
“The risk case is that they have to do more and that then also raises the risk of a hard landing,” Hatzius said.
Meantime, consumers’ reliance on leverage “supports spending in the short term but ultimately is not going to be a sustainable source of big increases in spending,” Hatzius said. “So it builds in a slowdown, sort of down the road.”
The timing of a downturn in housing will determine the turning point, he said. While that’s not yet evident in the data, it’s bound to come given the surge in mortgage rates, he said.
(Updates with comment on hard-landing risk in third paragraph after ‘Hard Landing’ subheadline. A previous version of this story corrected the projection for Fed policy rate.)
By Christopher Anstey
