12 Feb 2016
US: The risk from tighter financial conditions – Goldman Sachs
Jan Hatzius, Research Analyst at Goldman Sachs, suggests that they recently presented evidence that the risk of a US recession remains relatively low, mainly because of economic factors such as spare capacity and lack of significant overall debt growth.
Key Quotes
“But could the tightening in financial conditions— the third-biggest move in our Goldman Sachs Financial Conditions Index (GSFCI) since the 1980s—alone push the economy into recession?
We think this is unlikely, barring further significant FCI tightening. Empirically, the growth impulse from financial conditions is closely related to the year-on-year change in the FCI, which started to turn more adverse in late 2014 but has been reasonably constant since mid-2015. This means that FCI tightening is a good explanation for why US growth has slowed since late 2014, but not necessarily a good reason to expect further significant slowing from here, much less a recession.
It is also instructive to compare the current FCI impulse with the estimated fiscal impulse to growth in 2013. By our estimates, this impulse was significantly bigger, and the economy nevertheless escaped recession.”
Key Quotes
“But could the tightening in financial conditions— the third-biggest move in our Goldman Sachs Financial Conditions Index (GSFCI) since the 1980s—alone push the economy into recession?
We think this is unlikely, barring further significant FCI tightening. Empirically, the growth impulse from financial conditions is closely related to the year-on-year change in the FCI, which started to turn more adverse in late 2014 but has been reasonably constant since mid-2015. This means that FCI tightening is a good explanation for why US growth has slowed since late 2014, but not necessarily a good reason to expect further significant slowing from here, much less a recession.
It is also instructive to compare the current FCI impulse with the estimated fiscal impulse to growth in 2013. By our estimates, this impulse was significantly bigger, and the economy nevertheless escaped recession.”