This year, Goldman Sachs sees a bright economic outlook. In contrast to the general consensus, its economists predict strong growth of 2.3%, unemployment remaining around 4%, and the likelihood of a recession at barely 15%. And they anticipate that inflation, excluding energy and food, will keep falling, reaching just over 2% (by the end of the year, according to the favored metric of the Federal Reserve).

Predictions are cheap as chips. What makes Goldman’s important? To start with, its economists have always taken a soft landing stance, which seems to have been correct.

Second, the firm’s head economist Jan Hatzius also called for the reversal of this in 2008, which was both controversial and prophetic. The potential for mortgage defaults to trigger a severe recession was a valid concern that he raised at the time.

If you’re lucky enough to get one huge call right, you’ll have no followers. On both Wall Street and in Washington, Hatzius is among the most watched economists.

“Everyone on the White House economic team read Goldman obsessively, more than any other analyst,” stated Jason Furman, who served as President Obama’s economic adviser from 2009 to 2017. President Biden’s economic advisor Jared Bernstein recently referred to Hatzius as “ahead of the pack” on X. According to Powell’s publicly available calendars, he has met with Fed Chair Jerome Powell multiple times.

The fact that Hatzius has produced respectable predictions is clearly helpful. His two wins (in 2009 and 2011) of the Lawrence R. Klein Award for Blue Chip Forecast Accuracy put him in the elite group of economists. Though he was overly pessimistic about inflation in 2021 and 2022, his 2023 prediction was ranked fifth out of 68 by The Wall Street Journal for exactness.

But his team’s research volume and depth are what truly attract fans. The group of economists, which includes chief US economist David Mericle and twelve other economists from around the world, routinely releases comprehensive quantitative analyses of timely topics like the impact of artificial intelligence on long-term growth, the economic advantage of using masks instead of lockdowns, and the impact of large union wage settlements on inflation.

A set of economic indicators developed by the group is available for use. Among these, in 2000, Hatzius and his employer at the time, Bill Dudley, created an index of financial conditions that has since been copied. This index uses the dollar, stock prices, bond yields, interest rates, and stock prices to measure the complete impact of monetary policy.

A diverse range of methods

Hatzius, who is 55 years old, grew up in Germany. According to an interview he gave, he “was a little frustrated by the fact that anything goes in those areas,” referring to his early interests in politics and history. Views vary. Very few analytical frameworks are available.

Consequently, he earned a master’s degree in economics from Freiburg University and a doctorate from Oxford University. He decided his interests were too varied for the academic world, so he abandoned his dream of becoming a professor. He began working with Goldman in 1997 and took over as top U.S. economist in 2005 after Dudley left to become president of the New York Fed. In 2008, he was promoted to partner. In 2011, he was named chief economist, and in 2020, he will be named director of research.

Hatzius’s method relies heavily on his eclecticism. The desire to be “a brand—the bullish brand or the bearish brand” is something that Hatzius resists, according to Dudley.

According to psychologist Philip Tetlock, who Hatzius and I both admire, specialists can be either “hedgehogs” (very knowledgeable about a single topic) or “foxes” (very knowledgeable about a wide variety of topics). A “little bit of a fox” is required while dealing with analytical frameworks, according to Hatzius. When it comes to interest rates and economic cycles, there is no silver bullet.

An important announcement

Many experts in 2007 downplayed the importance of subprime mortgage losses, likening them to a terrible stock market day. Hatzius criticized the comparison in a paper he wrote that November. He pointed out that pension funds and other “long-only” investors “passively accept a hit to their net worth.” This was based on the work of economists Tobias Adrian and Hyun Song Shin.

Mortgages, on the other hand, are owned by leveraged organizations like Freddie Mac and Fannie Mae as well as investment dealers, hedge funds, and banks. These investors would have to reduce their assets by one dollar in order to maintain their capital-to-loss ratios. This was a major factor in Hatzius’s 2008 economic forecast, which was lower than the mainstream and indicated a greater likelihood of a recession.

Once again going against the grain, Hatzius accurately predicted that bond yields would decline following the recession, even though the federal government was running massive deficits. Hatzius reasoned that, given the weakness of private borrowing, state borrowing would not lead to higher inflation or interest rates, drawing on the work of British economist Wynne Godley on credit flows.

In particular, Hatzius has been inaccurate about when the Fed will change interest rates. After the pandemic ended, he failed to notice the spike in inflation and was sluggish to grasp the extent to which the Federal Reserve would respond by raising interest rates.

When it comes to human or central banker conduct, “you can be right about the big picture but still get the tactical calls wrong,” Hatzius added.

The future

From a macro perspective, Hatzius has maintained his stance that inflation can reach 2% again without an increase in the unemployment rate. “This cycle is different.” Those were the most risky words used by his team in late 2022 while naming their 2023 prognosis.

The firm’s argument was that a shrinking supply side would lead to lower inflation and a cooling of the overheated labor market through fewer openings rather than increased unemployment. Ultimately, the supply side showed even more improvement than Goldman anticipated, with growth in 2023 surpassing its optimistic prediction.

More of the same is what Hatzius and company anticipate for 2024.

Economists generally agree that a recession may be triggered by the delayed impact of increasing interest rates. However, lags are misunderstood, according to Hatzius. He stated that whereas the delays caused by rates on output levels are lengthy, those caused by increases in output growth are brief and have already passed. As a result, as the supply side continues to recover, inflation can keep falling while GDP remains strong.

New information has not been kind to Goldman’s prediction. Inflation was high and retail sales were poor in January. Goldman attributed the inflation to annual price increases that are based on historical trends rather than predictions for the future.

Home prices also increased sharply. The 13-page assessment published on Sunday by Goldman analyzed private rent data and the methods used by the Labor Department. He contended that the surge in January was unusual.

Many people are still skeptical of soft landings. Unemployment and recession, according to Dudley, are anticipated to increase significantly. However, Hatzius’s previous employer did admit that, “Things are definitely going Jan’s way.”