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How Goldman Sachs sees the outlook for the U.S. economy

In a recent blog, we outlined the views of Goldman Sachs strategists on the Australian economic outlook, and the implications for investors. In this blog,…

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6 months ago

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In a recent blog, we outlined the views of Goldman Sachs strategists on the Australian economic outlook, and the implications for investors. In this blog, we turn to the U.S. Given Goldman Sachs’s close relationship with the U.S. Federal Reserve, their views are certainly worth reading – particularly in relation to the likely direction of interest rates.

The key question is: can the U.S. bring inflation down without a recession?

According to Goldman Sachs, the Fed needs to avoid a perennial overheating labour market and get wage growth down to 3.5 per cent. To do that they need to shrink the job openings gap by reducing labour demand. (The job openings gap is the gap between jobs available and the number of unemployed. Currently the numbers of jobs available is almost twice the number of unemployed.)

Goldman Sachs thinks the U.S. needs a sustained period of lower growth to bring down labour demand. They also believe a soft landing is possible and therefore do not believe a recession is inevitable.

Is fiscal and monetary tightening working?

U.S. GDP has declined from 5.7 per cent in 2021 to just 0.5 per cent in 2022, suggesting fiscal and monetary tightening is working. In 2023, Goldman Sachs forecasts 0.5 per cent GDP, which is above consensus expectations of a recession. Lower growth is required to suppress labour demand and according to Goldman Sachs (or is that the Fed talking?) it is all going well so far.

The jobs/workers gap is coming down, and while there is a long way to go, the speed towards rebalancing so far has been quick. Fortunately, so far, all the decline in labour demand has been from a reduction of job openings, rather than a rise in unemployment.

Much as we are seeing in Australia, U.S. wage growth remains too high, and remains close to the peak, while inflation has come down. Goldman Sachs thinks wage growth will fall to four per cent in 2023, which is close to the 3.5 per cent target it needs to get to.

Where will the decline in inflation come from?

Goldman Sachs expects the decline in inflation to come from core goods inflation, like auto, which was a major driver of inflation last year. However, Goldman Sachs expects services inflation to remain high because labour-intensive services inflation will take longer to solve.

Shelter inflation, which is a leading indicator, has come down sharply recently. This is a big deal because a decline in goods inflation with a moderate decline in services will be acceptable to the Fed.

Consequently, Goldman Sachs sees the Fed slowing the pace of tightening. They expect the Fed to raise rates by 50 basis points this week, and then by 25 basis points in the February, March and May meetings, which would see rates reach 5.00-5.25 per cent.

Goldman Sachs notes more underlying resilience in demand despite higher rates and believes the peak fiscal and monetary policy drag has happened in 2022. The Fed will now try to keep inflation under control by keeping the economy on a low growth path. Importantly, Goldman Sachs doesn’t think the Fed will cut rates as soon as they bring inflation down. Estimates of neutral rates are inherently rubbery, so it is more likely monetary policy and rates will be left at higher levels unless the economy deteriorates too much. Nevertheless, Goldman Sachs sees rates cuts in 2024 and 2025 if the direction of the economy reverses too much.

A full-blown recession solves the inflation problem pretty quickly and so, in that case, the Fed would cut rates substantially. That view is reinforced by a divided government in the U.S., meaning the Fed will not receive much fiscal help from fiscal policy.

Separately, an earlier or fuller China reopening means more demand and that probably puts upward pressure on goods prices, making the Fed’s job tougher on battling inflation. A China reopening will see more disruptions in supply as people become infected while increased mobility will drive demand for energy and oil.

For the U.S. housing outlook, Goldman Sachs expects a further slowdown in housing activity. They note we have already seen some, but probably not as much as they would have expected. The last few years saw shortages of cars and homes, so when rates rise, the impact on homes in areas of tight supply will not be as evident.

Goldman Sachs has seen lower housing activity and lower prices and expect peak-to-trough house price declines of 12 per cent in aggregate but as much a 20 per cent decline in some regions.

According to Goldman Sachs, and in contrast to the views of independent research houses like Cross Border Capital, the normalisation of the Fed’s balance sheet is not a very important driver or influence of liquidity and markets. Quantitative Tightening is a relatively weak tool, and the whole balance sheet run-off to date is equivalent to just a 30 basis points rate hike. Fed officials share the Goldman Sachs view. If the Fed was only hiking 50 basis points or so then Quantitative Tightening would be more meaningful.

With respect to the inverted yield curve, the market is pricing a cut because it expects the economy will be weak and also rates will need to be lower longer-term. A difficult question for Goldman Sachs to answer is how long will it take to bring inflation back down and weaken demand. Goldman Sachs is moderately optimistic, and thinks the U.S. will get back to roughly pre-pandemic labour conditions with slightly higher inflation in a few years. They expect most of the reduction in labour demand to come via a less harmful reduction in job openings. The yield curve therefore doesn’t add much to the debate.

Read the previous blog here: How Goldman Sachs views the Australian economy

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Watch Yield Curve For When Stocks Begin To Price Recession Risk

Watch Yield Curve For When Stocks Begin To Price Recession Risk

Authored by Simon White, Bloomberg macro strategist,

US large-cap indices…

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14 mins ago

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May 31, 2023

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Watch Yield Curve For When Stocks Begin To Price Recession Risk

Authored by Simon White, Bloomberg macro strategist,

US large-cap indices are currently diverging from recessionary leading economic data. However, a decisive steepening in the yield curve leaves growth stocks and therefore the overall index facing lower prices.

Leading economic data has been signalling a recession for several months. Typically stocks closely follow the ratio between leading and coincident economic data.

As the chart below shows, equities have recently emphatically diverged from the ratio, indicating they are supremely indifferent to very high US recession risk.

What gives? Much of the recent outperformance of the S&P has been driven by a tiny number of tech stocks. The top five S&P stocks’ mean return this year is over 60% versus 0% for the average return of the remaining 498 stocks.

The belief that generative AI is imminently about to radically change the economy and that Nvidia especially is positioned to benefit from this has been behind much of this narrow leadership.

Regardless on your views whether this is overdone or not, it has re-established growth’s dominance over value. Energy had been spearheading the value trade up until around March, but since then tech –- the vessel for many of the largest growth stocks –- has been leading the S&P higher.

The yield curve’s behaviour will be key to watch for a reversion of this trend, and therefore a heightened risk of S&P 500 underperformance. Growth stocks tend to outperform value stocks when the curve flattens. This is because growth companies often have a relative advantage over typically smaller value firms by being able to borrow for longer terms. And vice-versa when the curve steepens, growth firms lose this relative advantage and tend to underperform.

The chart below shows the relationship, which was disrupted through the pandemic. Nonetheless, if it re-establishes itself then the curve beginning to durably re-steepen would be a sign growth stocks will start to underperform again, taking the index lower in the process.

Equivalently, a re-acceleration in US inflation (whose timing depends on China’s halting recovery) is more likely to put steepening pressure on the curve as the Fed has to balance economic growth more with inflation risks. Given the growth segment’s outperformance is an indication of the market’s intensely relaxed attitude to inflation, its resurgence would be a high risk for sending growth stocks lower.

Tyler Durden Wed, 05/31/2023 - 13:20

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COVID-19 lockdowns linked to less accurate recollection of event timing

Participants in a survey study made a relatively high number of errors when asked to recollect the timing of major events that took place in 2021, providing…

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May 31, 2023

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Participants in a survey study made a relatively high number of errors when asked to recollect the timing of major events that took place in 2021, providing new insights into how COVID-19 lockdowns impacted perception of time. Daria Pawlak and Arash Sahraie of the University of Aberdeen, UK, present these findings in the open-access journal PLOS ONE on May 31, 2023.

Credit: Arianna Sahraie Photography, CC-BY 4.0 (https://creativecommons.org/licenses/by/4.0/)

Participants in a survey study made a relatively high number of errors when asked to recollect the timing of major events that took place in 2021, providing new insights into how COVID-19 lockdowns impacted perception of time. Daria Pawlak and Arash Sahraie of the University of Aberdeen, UK, present these findings in the open-access journal PLOS ONE on May 31, 2023.

Remembering when past events occurred becomes more difficult as more time passes. In addition, people’s activities and emotions can influence their perception of the passage of time. The social isolation resulting from COVID-19 lockdowns significantly impacted people’s activities and emotions, and prior research has shown that the pandemic triggered distortions in people’s perception of time.

Inspired by that earlier research and clinical reports that patients have become less able to report accurate timelines of their medical conditions, Pawlak and Sahraie set out to deepen understanding of the pandemic’s impact on time perception.

In May 2022, the researchers conducted an online survey in which they asked 277 participants to give the year in which several notable recent events occurred, such as when Brexit was finalized or when Meghan Markle joined the British royal family. Participants also completed standard evaluations for factors related to mental health, including levels of boredom, depression, and resilience.

As expected, participants’ recollection of events that occurred further in the past was less accurate. However, their perception of the timing of events that occurred in 2021—one year prior to the survey—was just an inaccurate as for events that occurred three to four years earlier. In other words, many participants had difficulty recalling the timing of events coinciding with COVID-19 lockdowns.

Additionally, participants who made more errors in event timing were also more likely to show greater levels of depression, anxiety, and physical mental demands during the pandemic, but had less resilience. Boredom was not significantly associated with timeline accuracy.

These findings are similar to those previously reported for prison inmates. The authors suggest that accurate recollection of event timing requires “anchoring” life events, such as birthday celebrations and vacations, which were lacking during COVID-19 lockdowns.

The authors add: “Our paper reports on altered timescapes during the pandemic. In a landscape, if features are not clearly discernible, it is harder to place objects/yourself in relation to other features. Restrictions imposed during the pandemic have impoverished our timescape, affecting the perception of event timelines. We can recall that events happened, we just don’t remember when.

#####

In your coverage please use this URL to provide access to the freely available article in PLOS ONE: https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0278250

Citation: Pawlak DA, Sahraie A (2023) Lost time: Perception of events timeline affected by the COVID pandemic. PLoS ONE 18(5): e0278250. https://doi.org/10.1371/journal.pone.0278250

Author Countries: UK

Funding: The authors received no specific funding for this work.

Journal

PLoS ONE

DOI

10.1371/journal.pone.0278250

Method of Research

Survey

Subject of Research

Not applicable

Article Title

Lost time: Perception of events timeline affected by the COVID pandemic

Article Publication Date

31-May-2023

COI Statement

The authors have declared that no competing interests exist.

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Hyro secures $20M for its AI-powered, healthcare-focused conversational platform

Israel Krush and Rom Cohen first met in an AI course at Cornell Tech, where they bonded over a shared desire to apply AI voice technologies to the healthcare…

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2 hours ago

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May 31, 2023

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Israel Krush and Rom Cohen first met in an AI course at Cornell Tech, where they bonded over a shared desire to apply AI voice technologies to the healthcare sector. Specifically, they sought to automate the routine messages and calls that often lead to administrative burnout, like calls about scheduling, prescription refills and searching through physician directories.

Several years after graduating, Krush and Cohen productized their ideas with Hyro, which uses AI to facilitate text and voice conversations across the web, call centers and apps between healthcare organizations and their clients. Hyro today announced that it raised $20 million in a Series B round led by Liberty Mutual, Macquarie Capital and Black Opal, bringing the startup’s total raised to $35 million.

Krush says that the new cash will be put toward expanding Hyro’s go-to-market teams and R&D.

“When we searched for a domain that would benefit from transforming these technologies most, we discovered and validated that healthcare, with staffing shortages and antiquated processes, had the greatest need and pain points, and have continued to focus on this particular vertical,” Krush told TechCrunch in an email interview.

To Krush’s point, the healthcare industry faces a major staffing shortfall, exacerbated by the logistical complications that arose during the pandemic. In a recent interview with Keona Health, Halee Fischer-Wright, CEO of Medical Group Management Association (MGMA), said that MGMA’s heard that 88% of medical practices have had difficulties recruiting front-of-office staff over the last year. By another estimates, the healthcare field has lost 20% of its workforce.

Hyro doesn’t attempt to replace staffers. But it does inject automation into the equation. The platform is essentially a drop-in replacement for traditional IVR systems, handling calls and texts automatically using conversational AI.

Hyro can answer common questions and handle tasks like booking or rescheduling an appointment, providing engagement and conversion metrics on the backend as it does so.

Plenty of platforms do — or at least claim to. See RedRoute, a voice-based conversational AI startup that delivers an “Alexa-like” customer service experience over the phone. Elsewhere, there’s Omilia, which provides a conversational solution that works on all platforms (e.g. phone, web chat, social networks, SMS and more) and integrates with existing customer support systems.

But Krush claims that Hyro is differentiated. For one, he says, it offers an AI-powered search feature that scrapes up-to-date information from a customer’s website — ostensibly preventing wrong answers to questions (a notorious problem with text-generating AI). Hyro also boasts “smart routing,” which enables it to “intelligently” decide whether to complete a task automatically, send a link to self-serve via SMS or route a request to the right department.

A bot created using Hyro’s development tools. Image Credits: Hyro

“Our AI assistants have been used by tens of millions of patients, automating conversations on various channels,” Krush said. “Hyro creates a feedback loop by identifying missing knowledge gaps, basically mimicking the operations of a call center agent. It also shows within a conversation exactly how the AI assistant deduced the correct response to a patient or customer query, meaning that if incorrect answers were given, an enterprise can understand exactly which piece of content or dataset is labeled incorrectly and fix accordingly.”

Of course, no technology’s perfect, and Hyro’s likely isn’t an exception to the rule. But the startup’s sales pitch was enough to win over dozens of healthcare networks, providers and hospitals as clients, including Weill Cornell Medicine. Annual recurring revenue has doubled since Hyro went to market in 2019, Krush claims.

Hyro’s future plans entail expanding to industries adjacent to healthcare, including real estate and the public sector, as well as rounding out the platform with more customization options, business optimization recommendations and “variety” in the AI skills that Hyro supports.

“The pandemic expedited digital transformation for healthcare and made the problems we’re solving very clear and obvious (e.g. the spike in calls surrounding information, access to testing, etc.),” Krush said. “We were one of the first to offer a COVID-19 virtual assistant that deployed in under 48 hours based on trusted information from the health system and trusted resources such as the CDC and World Health Organization …. Hyro is well funded, with good growth and momentum, and we’ve always managed a responsible budget, so we’re actually looking to expand and gather more market share while competitors are slowing down.”

Hyro secures $20M for its AI-powered, healthcare-focused conversational platform by Kyle Wiggers originally published on TechCrunch

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