Note: The following is a redacted version of the original report published November 12, 2023 [19 pgs].

12 November 2023 | 5:28PM EST

US Economics Analyst

2024 US Economic Outlook: Final Descent (Mericle)

n The US economy defied recession fears in 2023 and made substantial progress Jan Hatzius
+1(212)902-0394 | jan.hatzius@gs.com
toward a soft landing. The key surprise has been much stronger than expected Goldman Sachs & Co. LLC

GDP growth, though this has not prevented the labor market from continuing to Alec Phillips
+1(202)637-3746 | alec.phillips@gs.com
rebalance or inflation from continuing to fall. Goldman Sachs & Co. LLC

David Mericle
n The hard part of the inflation fight now looks over. It was fair to wonder last year +1(212)357-2619 |
david.mericle@gs.com
whether labor market overheating and an at times unsettling high inflation Goldman Sachs & Co. LLC

mindset could be reversed painlessly. But these problems now look largely Spencer Hill, CFA
+1(212)357-7621 | spencer.hill@gs.com
solved, the conditions for inflation to return to target are in place, and the Goldman Sachs & Co. LLC

heaviest blows from monetary and fiscal tightening are well behind us. As a Ronnie Walker
+1(917)343-4543 |
result, we now see only a historically average 15% probability of recession over ronnie.walker@gs.com
Goldman Sachs & Co. LLC
the next 12 months.
Tim Krupa
+1(202)637-3771 | tim.krupa@gs.com
n Core inflation has fallen sharply from its pandemic peak and should begin its final Goldman Sachs & Co. LLC
descent in 2024. We see further disinflation in the pipeline from rebalancing in Manuel Abecasis
+1(212)902-8357 |
the auto, housing rental, and labor markets, though we expect a small offset manuel.abecasis@gs.com
Goldman Sachs & Co. LLC
from a delayed acceleration in healthcare. Wage growth has fallen most of the
way to its 3.5% sustainable pace, and surveys suggest it will get there next year.
All of this should push core PCE inflation to around 2.4% by December 2024.
n We expect GDP to grow 1.8% in 2024 on a Q4/Q4 basis (or 2.1% on a full-year
basis), again easily beating low consensus expectations. We forecast just under
2% consumption growth, with real disposable income growth of nearly 3%
partly offset by a 1pp rise in the saving rate. We also forecast slower business
investment growth of roughly 2% as the surge in manufacturing facility
investment driven by CHIPS Act and Inflation Reduction Act subsidies slows, and
flat residential investment as the housing shortage continues to temper the
impact of reduced affordability.
n We expect the FOMC to deliver its first rate cut in 2024Q4 once core PCE
inflation falls below 2.5%. We then expect one 25bp cut per quarter until
2026Q2, when the fed funds rate would reach 3.5-3.75%, a higher equilibrium
rate than last cycle. While we do not have any major macroeconomic shocks in
our 2024 forecast, we think the bar to cut in response to a growth scare will be
low in coming years and would not be surprised by insurance cuts at some
point.
n Two key risks remain top of mind. The first is geopolitical conflict and the risk of

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Goldman Sachs US Economics Analyst

a spike in oil prices. While possible, we think this would more likely be a setback in
the inflation fight than a gamechanger. The second is the risk that something could
“break” in the abrupt transition to a higher interest rate regime. Our analysis
suggests that the risks are real but manageable, in part because the Fed would be at
liberty to cut in response next year and will have plenty of room.

12 November 2023 2
Goldman Sachs US Economics Analyst

2024 US Economic Outlook: Final Descent

The US economy defied recession fears in 2023 and made substantial progress toward
a soft landing. The key surprise this year has been much stronger than expected GDP
growth (Exhibit 1). We had seen reacceleration as the key risk at the start of the year as
the drag on growth from monetary and fiscal policy tightening subsided, but we
assumed if it materialized while inflation was still high, the Fed would likely hike more
aggressively to ensure that demand growth remained subdued so that supply could
continue to catch up. Why didn’t it? In the spring the banking stress heightened
concern about raising rates too much, and by the summer it became clear that strong
GDP growth was not preventing the labor market from continuing to rebalance or wage
growth and inflation from continuing to fall after all.

Exhibit 1: Stronger Than Expected GDP Growth Was the Key Surprise of 2023 ...

Percent change, year-on-year Percent change, year-on-year

3.5 US 2023 Real GDP Growth Forecasts 3.5

3.0 GS Bloomberg Consensus 3.0

2.5 Forecasts as of Nov. 2022: 2.5

GS 1.0%, Consensus 0.4%
2.0 2.0

1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
2022 2023

Source: Goldman Sachs Global Investment Research, Bloomberg

In fact, despite strong growth, progress on both fronts has been faster this year than
last (Exhibit 2). How have we been able to have it both ways in 2023? Part of the
answer is the outperformance of the supply side: labor supply has not just mostly
recovered but more than recovered, transitory influences on wages and prices have
faded or reversed, and high prices have cured themselves by, for example, incentivizing
massive construction of rental housing. More surprising at first glance is why labor
demand has been contained even as final demand for goods and services accelerated
and recession fears faded, but we suspect this reflects the logic that drives the
non-linearity of the Beveridge curve, where extremely tight labor markets create a
feedback loop between workers quitting and employers preemptively posting more job
openings, which can heat up quickly but can cool down quickly too.

12 November 2023 3
Goldman Sachs US Economics Analyst

Exhibit 2: ... But Strong Demand Growth Has Not Prevented the Labor Market from Rebalancing
Substantially Further or Wage Growth and Inflation from Falling This Year

Percent change, year ago Millions

9 The Slowdown Required to Rebalance the Labor Market 9
Starting Point and Calm Wage Growth and Inflation
8 8
End of 2022
7 2023 Latest 7
3m Annualized
6 Required, GS Estimate Q3 Annualized Rate 6
Dallas Fed
Trimmed Mean
5 5
2023Q4 Annualized,
4 GS Tracking 4
3 3
2 2
1 1
0 0
Domestic Final Jobs-Workers Wage Growth Core PCE Inflation (left)
Sales Growth (left) Gap (right)* (left)

Below-potential ...lowers the jobs- ...which slows down ...to bring down
demand growth... workers gap... wage growth... core inflation
* Based on job openings measures from JOLTS, Indeed, and LinkUp.

Source: Goldman Sachs Global Investment Research

The Hard Part Is Over

It was fair to wonder at the outset of the Fed’s hiking cycle whether extreme labor
market overheating and an at times unsettling high inflation mindset could be reversed
painlessly without a recession. After all, to expect this was to expect something
historically unprecedented. While we felt strongly that there was a coherent way to
navigate these problems gently, that did not mean it would be simple.

But at this point the hard part of the inflation fight looks over. Following a vertical drop
on the Beveridge curve (Exhibit 3, left), the unemployment rate is barely changed but
other measures of labor market tightness have fallen sharply and are now on average
only slightly above pre-pandemic levels (Exhibit 3, right). This cooling off to date is likely
good enough or nearly good enough because inflation was a bit too low before the
pandemic, and this means that further below-potential growth is no longer needed.

12 November 2023 4
Goldman Sachs US Economics Analyst

Exhibit 3: After a Painless Rebalancing Captured by the Vertical Drop on the Beveridge Curve, Measures of Labor Market Tightness Are
Now Only Slightly Above Pre-Pandemic Levels on Average
Beveridge Curve: Z-scores Z-scores
Job Openings Rate vs. Unemployment Rate 5 Measures of Labor Market Tightness 5
8
Sep 2021 - JOLTS: Quits Rate
Present 4 4
Conference Board: Labor Market Differential
7 3 NFIB: % of Firms With Positions Not Able to Fill 3
Jobs-Workers Gap*
2 Unemployment Rate (Inverted) 2
6 Apr 2020 -
Average
Job Openings Rate (%)

Aug 2021
1 1
End-2023 (f)
5 0 0

-1 -1
4
-2 -2
3 -3 -3
Jan 2009 -
Mar 2020
Jan 2001 - -4 -4
2
Dec 2008
-5 -5
1 -6 -6
3 4 5 6 7 8 9 10 11 12 13 14 15 2001 2004 2007 2010 2013 2016 2019 2022
Unemployment Rate (%)
* For 2020-present, uses average jobs-workers gap implied by JOLTS, Indeed, and LinkUp.

Source: Goldman Sachs Global Investment Research, Department of Labor, The Conference Board, NFIB

Inflation psychology has normalized too from the days when prices seemed to be
spiking everywhere and many businesses and workers felt it was only fair that their own
prices and wages rise accordingly. The Fed’s composite inflation expectations index has
fallen sharply to a roughly target-consistent level as the price shocks associated with
reopening and shortages have become a more distant memory (Exhibit 4).

Exhibit 4: Inflation Expectations Have Fallen Sharply to Roughly Target-Compatible Levels

Percent Percent
2.50 Index of Common Inflation Expectations, 2.50
Projected onto Survey of Professional Forecasters 10Y PCE Expectations

2.25 2.25

2.00 2.00

1.75 1.75
1999 2002 2005 2008 2011 2014 2017 2020 2023

Source: Federal Reserve Board

With the more daunting problems largely solved, the conditions for inflation to return to
target in place, and the heaviest blows from monetary and fiscal tightening well behind
us (Exhibit 10 below), we now see only a historically average 15% probability of
recession over the next 12 months. The consensus, in contrast, still sees a much higher
recession probability of 48% over the next 12 months (Exhibit 5).

12 November 2023 5
Goldman Sachs US Economics Analyst

Exhibit 5: With the Hard Part of the Inflation Fight Now Behind Us, We See Only a Historically Average
Recession Probability of 15% Over the Next 12 Months

Percent US 12-Month Ahead Recession Probability Percent

100 GS Bloomberg Consensus 100
April 2022: September 2023:
Launched GS Lowered to 15% on
Tracking at 15% March 2023:
Continued Positive
80 Raised to 35%
Labor Market and 80
October 2022: on Banking
Inflation News
Raised to 35% Stress
on Hawkish Fed
60 June 2022:
June 2023: 60
February 2023: Lowered to 25%
Raised to 30% July 2023:
Lowered to 25% on Receding
x Debt
on Higher Loweredxto
on Labor Market Limit and Banking
40 Inflation 20% on 40
Adjustment Risks
Disinflation
Progress

20 20

0 0
Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23

Source: Goldman Sachs Global Investment Research, Bloomberg

2024 Inflation Outlook: Final Descent

Inflation has fallen sharply from its pandemic peak and should begin its final descent in
2024. Core PCE inflation is down from a 5.5-6% to a 2.5-3% sequential annualized pace
(Exhibit 6), and other measures of the underlying trend such as the trimmed mean and
the median have softened significantly as well.

Exhibit 6: Core Inflation Has Fallen Sharply from the Peak and Is on Track to Fall Further in 2024

Percent Core PCE Inflation and GS Forecast Percent

7 7

6 6

5 5

4 4

3 3

2 2
Core PCE 3m Annualized Rate
1 Core PCE 6m Annualized Rate 1
Core PCE YoY
0 0

-1 -1

-2 -2
Jan-19 Oct-19 Jul-20 Apr-21 Jan-22 Oct-22 Jul-23 Apr-24

Source: Goldman Sachs Global Investment Research, Department of Commerce

We see further disinflation in the pipeline from rebalancing in the auto, housing rental,
and labor markets. In the auto market, it took longer than expected but eventually fixing
supply chain problems, restoring production to normal levels, and rebuilding inventories
reintroduced competition among dealers and manufacturers that has begun to reverse

12 November 2023 6
Goldman Sachs US Economics Analyst

shortage-driven price spikes. Inventory levels have more room to recover in 2024, and
new and used car prices have further to fall (Exhibit 7, left).

In the housing rental market, normalization of elevated pandemic demand and a large
increase in apartment supply has slowed leading indicators of new tenant rent inflation
to a 1-2% annualized pace this year (Exhibit 7, right). The official housing inflation
numbers have slowed less because they also cover continuing tenant rents, which fell
behind the rapid growth of market rates in 2021 and 2022 and have been catching up.
But we estimate that the gap between market rates and continuing tenant rents has
fallen from 7.5% to around 2%, meaning that catch-up is coming to an end and the
official numbers should converge more quickly toward the slower pace of the leading
indicators next year.

Exhibit 7: There Is More Disinflation in the Pipeline on the Goods Side from Autos and on the Services Side from Shelter
Percent of avg. 2019 level Dollars per vehicle Percent change, year ago Percent change, year ago
110 New Car Inventories (left) 16 16
Auto Dealer Incentives (right) 4,300 Average of CoStar, Zillow, and Yardi Rent Measures
100 14 14
New-Tenant Repeat Rent Index
3,800
90 Continuing-Tenant Rent Index
12 12
PCE Rent + OER
80 3,300
10 10

70 2,800 8 8

60 6 6
2,300
50 4 4
1,800
40 2 2
1,300 Leading Indicators of Market
30 0 Rent Inflation in Q3: 1.6% 0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
20 800 Note: Includes adjustments to the most recent quarters of New-Tenant Repeat Rent Index and
Continuing-Tenant Rent Index
Jan-19 Sep-19 May-20 Jan-21 Sep-21 May-22 Jan-23 Sep-23

Source: Goldman Sachs Global Investment Research, Department of Commerce, CoStar, Zillow, Yardi, Department of Labor

In the labor market, a narrower jobs-workers gap and lower year-ahead inflation
expectations have brought our wage growth tracker down from a peak of 5.6%
year-on-year to 4.4%, and business surveys point to a further decline next year to
roughly the 3.5% rate that we estimate would be compatible with 2% inflation (Exhibit
8). While recent headlines about union wage demands have sparked concern about a
reacceleration, the wage hikes they have won have not been as large as advertised, and
unionized workers’ wage growth rate is a lagging indicator because they tend to have
longer-lasting contracts.

12 November 2023 7
Goldman Sachs US Economics Analyst

Exhibit 8: Wage Growth Is Slowing, and Business Surveys Point to Further Deceleration Next Year to the 3.5% Rate Compatible with 2%
Inflation
Percent change, year ago Percent change, year ago Percent change, annual rate Percent change, annual rate
7 7 10 10
GS Wage Tracker
Employment Cost Index* 9 GS Wage Survey Tracker* 9
Average Hourly Earnings** Indeed Wage Tracker
6 Atlanta Fed Wage Tracker*** 6 8 8

7 7

5 5 6 6

5 5

4 4 4 4

3 3

3 3 2 2

1 1

2 2 0 0
2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Note: Our wage tracker extracts the common signal from several high-quality wage growth * Average of NFIB, Dallas Fed manufacturing, Dallas Fed services, Richmond Fed
measures. *Private industry workers ex-incentive paid occupations. **All private industry workers, Manufacturing, Richmond Fed services, NY Fed services, and Kansas City Fed services, scaled
GS composition-adjusted from 2020-2021. ***Non-smoothed median wage growth, adjusted to 6-month annualized average hourly earnings.
down by 0.5pp to account for composition difference from other measures.

Source: Goldman Sachs Global Investment Research, Department of Labor, Federal Reserve, Indeed

We expect a small offset to these disinflationary pressures from a delayed acceleration

in the healthcare sector, where multi-year contracts have so far prevented large cost
increases from flowing through fully to prices.

These and other trends are summarized in our component-level forecast table (Exhibit
9) and described in more depth in our 2024 Inflation Outlook. We expect core PCE
goods inflation to fall from 0.1% now to -1.2% in December 2024, housing services to
fall from 7.2% to 4.1%, and core services ex-housing to fall from 4.3% to 3.4%,
implying a decline in overall core PCE inflation from 3.7% to 2.4% by December 2024.
Core CPI inflation is likely to run hotter this fall and winter, but we expect it to fall to
2.7% by December 2024.

While we are confident that core inflation will fall meaningfully further next year, it is
worth bearing in mind that it was hard to forecast even in the pre-pandemic decades of
low and stable inflation, when the average absolute year-ahead forecast error for private
sector and Fed forecasters was about 0.4pp. Surprises of that magnitude should not be
surprising, and they are large enough to influence Fed policy.

12 November 2023 8
Goldman Sachs US Economics Analyst

Exhibit 9: We Expect Core PCE Inflation to Fall to 3.3% by December 2023 and 2.4% by December 2024, with
Declines in Most Categories Partly Offset by a Delayed Acceleration in Health Care Services
GS Bottom-up Core PCE Forecast
Sep. 2023 Dec. 2023 Dec. 2024
Contribution Contribution
Weight YoY YoY to Change
YoY to Change

Core PCE 100.0 3.7 3.3 -0.4 2.4 -1.3

Core Goods 26.1 0.1 0.0 0.0 -1.2 -0.3

New Vehicles 2.4 2.6 0.7 0.0 -1.7 -0.1
Used Vehicles 1.5 -8.0 -7.3 0.0 -5.5 0.0
Household Appliances 0.5 -6.4 -8.2 0.0 -3.5 0.0
Video, Audio, Computers 2.5 -7.1 -6.0 0.0 -9.0 0.0
Recreational Vehicles 0.6 2.0 0.7 0.0 1.0 0.0
Jewelry, Watches 0.6 0.5 0.2 0.0 1.1 0.0
Clothing & Footwear 3.1 2.4 2.6 0.0 0.3 -0.1
Pharma & Medical 3.9 3.4 3.7 0.0 1.9 -0.1
Pets Products 0.7 4.8 3.4 0.0 1.3 0.0
Expenditures Abroad 0.1 11.5 6.7 0.0 0.5 0.0
Residual Core Goods 10.1 0.1 0.1 0.0 -0.7 -0.1

Core Services 73.9 5.0 4.4 -0.4 3.6 -1.1

Housing 17.4 7.2 6.3 -0.1 4.1 -0.5
Ground Transportation 0.4 2.2 2.1 0.0 1.9 0.0
Air Transportation 1.2 3.5 0.2 0.0 3.9 0.0
Food Services & Accommodation 8.3 6.0 4.8 -0.1 3.5 -0.2
Financial Services & Insurance 8.2 5.6 5.1 0.0 3.4 -0.2
Medical Services 18.3 2.3 2.6 0.1 3.3 0.2
Foreign Travel 1.4 -0.7 -4.6 -0.1 2.6 0.0
Residual Core Services 18.7 5.4 5.0 -0.1 3.5 -0.4

Core services ex. housing 56.5 4.3 3.8 -0.3 3.4 -0.5

Source: Goldman Sachs Global Investment Research, Department of Commerce

2024 Growth Outlook: Holding Up at Higher Rates

We think that the main reason the economy accelerated from 2022 to 2023 is that the
impact of fiscal and monetary policy tightening on GDP growth diminished sharply. The
impact should be similar next year, with a bit of further drag from both fiscal tightening
and the recent tightening in financial conditions worth about ¼-½pp in total.

12 November 2023 9
Goldman Sachs US Economics Analyst

Exhibit 10: The Drag on GDP Growth from Fiscal and Monetary Policy Tightening Peaked in 2022, Declined
Sharply in 2023, and Should Remain Modest in 2024

Percentage points Percentage points

Impulse to Quarterly Annualized GDP Growth
6 6
from Fiscal Policy and Financial Conditions,
GS Estimates, 3-Quarter Centered Moving Averages
4 4
Fiscal Impulse
2 Financial Conditions Impulse 2
Total
0 0

-2 -2

-4 -4

-6 -6

-8 -8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2021 2022 2023 2024

Source: Goldman Sachs Global Investment Research

Below we discuss the growth outlook by GDP component. Our return to a textbook C +
I + G + NX approach and our traditional forecasting models marks the end of the period
when assumptions about special factors such as virus spread or supply chain disruptions
played a large role in cyclical trends.

Consumption
Our 2024 Consumer Outlook notes that we expect slowing but solid job gains, roughly
1% real wage growth, and a large increase in household interest income to fuel real
disposable income growth of nearly 3% next year (Exhibit 11). Interest income will
accrue mostly to the top income quintile, where we expect 4% real income growth,
versus just 1½% for the bottom income quintile.

We expect strong income growth to be partly offset by a 1pp rise in the saving rate. The
saving rate ought to be very low at the moment because both the precautionary and
retirement motives for saving are weak at a time when the layoff rate is low and the
wealth-to-income ratio is historically high, but it is a little too low compared to its
pre-pandemic level, when the same was true to a slightly lesser degree.

On net, real income growth of just under 3% and a 1pp rise in the saving rate imply
consumption growth of just under 2% in 2024 on a Q4/Q4 basis. The last few years
have seen large shifts in the composition of consumer spending between goods and
services, but we think that these are largely over. While the share of services in total
consumer spending remains below its pre-pandemic level, this appears to be due to the
large increase in the share of people working from home, which has now stabilized.

12 November 2023 10
Goldman Sachs US Economics Analyst

Exhibit 11: We Expect Real Disposable Income Growth of Just Under 3% to Be Partially Offset by a Modest Rise in the Saving Rate,
Resulting in Consumption Growth of Just Under 2% in 2024
Percent change Real Income Growth, Percent change Percent Percent
5.0 2024 Q4/Q4 Basis 5.0 35 Personal Saving Rate 35
Shaded income drivers
4.5 likely to have a muted 4.5
effect on spending.
4.0 4.0 30 30
Blue indicates increase
3.5 Red indicates decrease 3.5
25 25
3.0 3.0
2.5 2.5
20 20
2.0 2.0
1.5 1.5 15 15
1.0 1.0
0.5 0.5 10 10
0.0 0.0

Total
Other
Other Transfers
Job Gains

Medicaid
Real Wages

Interest Income

5 5

0 0
Jan-17 Jul-18 Jan-20 Jul-21 Jan-23 Jul-24

Source: Goldman Sachs Global Investment Research, Department of Commerce

Business investment
Our 2024 Business Investment Outlook highlights two key headwinds and two key
tailwinds. The headwinds are the end of the surge in new manufacturing facility
investment driven by CHIPS Act and Inflation Reduction Act subsidies, which accounted
for all of the net growth in business investment this year, and more difficult financing
conditions, especially for commercial real estate. The tailwinds are rising investment in
artificial intelligence and less self-restraint as business leaders’ recession fears fade.
We expect these forces to net out to business investment growth of 1¾% in 2024.

Exhibit 12: Business Investment Is Likely to Decelerate in 2024 as the Growth Boost to Manufacturing
Structures from CHIPS Act and Inflation Reduction Act Subsidies Fades

Percent change, annual rate Percent change, annual rate

12 Real Nonresidential Fixed Investment Growth 12

9 9

6 GS forecast 6

3 3

0 0

-3 Contribution from: -3
Stuctures related to
-6 the IRA and CHIPS Act* -6
Other structures Equipment
-9 -9
IPP Total
-12 -12
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2021 2022 2023 2024 2025
*GS estimate based on analysis of public announcements of structures investment and construction spending.

Source: Goldman Sachs Global Investment Research, Department of Commerce

12 November 2023 11
Goldman Sachs US Economics Analyst

Residential investment
Our 2024 Housing Outlook calls for higher mortgage rates to keep existing home sales
very weak next year at around 3.8mn because nearly all mortgage holders are paying
interest rates below market rates, which makes moving costly, but to have less impact
on homebuilding, where a serious national shortage of single-family homes should
continue to temper the impact of higher mortgage rates. Overall, we expect residential
investment to end 2024 roughly flat. The same competing forces—low affordability but
very tight supply—should generate modest home price growth of about 1% next year.

Exhibit 13: We Forecast Roughly Flat Residential Investment in 2024 as the Housing Shortage Continues to Temper the Impact of the Decline
in Affordability Caused by Higher Home Prices and Mortgage Rates
Percent Percent Index Index
Homeowner Vacancy Rate GS Housing Affordability Index
3.5 3.5 160 160

150 150
3.0 3.0
140 140

2.5 2.5 130 130

120 120
2.0 2.0
110 110
1.5 1.5 Reduced
100 100
Affordability
90 90
1.0 1.0
80 80
0.5 0.5
70 70

0.0 0.0 60 60
1956 1965 1974 1983 1992 2001 2010 2019 97 99 01 03 05 07 09 11 13 15 17 19 21 23

Source: Goldman Sachs Global Investment Research, Department of Commerce

Government spending
We are penciling in roughly flat federal spending and 0.5% growth in state and local
spending in 2024. We continue to see some risk of a government shutdown either this
week or early next year, which would shift growth between quarters, and some
downside risk to our full-year forecast if Congress continues to avoid shutdowns
through temporary extensions, which would lead to automatic spending cuts that take
effect in May, resulting in a step-down in funding of 0.4% of GDP in 2024Q2 and
2024Q3.

Net exports
Our 2024 Trade Outlook notes that US imports have come down from an elevated level
fueled by pandemic stimulus, but US exports remain depressed. We expect a recovery
in foreign growth next year to boost demand for US exports, narrowing the trade deficit
enough in 2024 to contribute 0.2pp to GDP growth. Beneath the surface, some
changes in US trade patterns—the increase in petroleum net exports due to rising shale
production in response to higher prices, and the decline in travel services exports due to
tighter visa restrictions—look likely to persist.

12 November 2023 12
Goldman Sachs US Economics Analyst

Total GDP
Adding up these components, we expect real GDP to grow 1.8% in 2024 on a Q4/Q4
basis (or 2.1% on a full-year basis), once again easily beating low consensus
expectations (Exhibit 14).

Exhibit 14: Our 2024 Q4/Q4 GDP Growth Forecast of 1.8% Is Well Above the Consensus Forecast of 1.0%

Percent, Q4/Q4 2024 Growth Forecasts Percent, Q4/Q4

4 4
Bloomberg Consensus GS

3 3

2 2

1 1

0 0
Real GDP Consumer Spending
Government Spending
Private Investment Exports Imports

Source: Goldman Sachs Global Investment Research, Bloomberg

GDP growth near the economy’s potential growth rate should mean roughly stable
labor market conditions in 2024. We put the current trend pace of job growth at around
175k per month and expect it to slow to 130k in 2024H1 and 100k in 2024H2, near our
slightly higher than usual estimate of the breakeven pace that would stabilize the
unemployment rate while immigration remains elevated. We do not attach much
significance to the recent modest rise in the unemployment rate and expect it to
continue hovering in the mid-to-high 3s next year because the layoff rate remains low
and job openings remain even higher than in 2019—one of the best labor markets in US
history—in nearly every industry.

2024 Fed Outlook: A Long Road to Rate Cuts and a Higher Equilibrium Rate
We expect the FOMC to deliver its first rate cut in 2024Q4 once core PCE inflation falls
below 2.5%. We then expect one 25bp cut per quarter until 2026Q2, when the fed
funds rate would reach 3.5-3.75% (Exhibit 15). While we see rate cuts next year as
optional in that they are not necessary to avoid recession, we expect the FOMC to
conclude that while neutral might not be as low as the 2.5% median longer run dot, it
probably is not as high as 5.25-5.5%, so some amount of normalization makes sense as
inflation falls. We think this rationale is enough to cut to 3.5-3.75% but probably not
further. Our forecast could be thought of as a compromise between Fed officials who
see little reason to keep the funds rate high once the inflation problem is solved and
those who see little reason to stimulate an already-strong economy.

We expect the equilibrium rate to be higher than last cycle because the post-financial
crisis headwinds are behind us, much larger fiscal deficits that boost aggregate demand

12 November 2023 13
Goldman Sachs US Economics Analyst

are likely to persist, the funds rate is approaching equilibrium from above rather than
below, and the r* narrative is changing. We discussed these issues in a recent Q&A
on Fed policy, financial conditions, and the neutral rate.

Exhibit 15: We Expect the FOMC to Deliver Its First Rate Cut in 2024Q4 and Then Cut 25bp Per Quarter to an
Equilibrium Rate of 3.5-3.75%, Higher Than Last Cycle

Percent Federal Funds Rate Percent

6 GS Baseline 6

5 5

4 4
We expect the first cut in 2024Q4,
3 when core PCE inflation falls 3
below 2.5% year-on-year

2 3.5-3.75% equilibrium rate 2

1 1

0 0
2022 2023 2024 2025 2026

Source: Goldman Sachs Global Investment Research

Other paths are also possible. The FOMC undertook two dovish pivots last cycle in
response to growth scares that did not look like serious recession threats to us, and if
the bar for responding was low last cycle, it will likely be even lower starting from a
higher funds rate of 5.25-5.5%. As a result, while we do not have any major
macroeconomic shocks in our forecast for 2024, we would not be surprised by
insurance cuts at some point.

The judgmental probabilities that we assign to several plausible paths for the funds rate
over the next couple of years—no rate cuts, gradual normalization as inflation falls in our
baseline, insurance cuts, and cuts in a potential recession—imply a probability-weighted
average Fed path that is below our baseline path but somewhat above market pricing,
although much less so than earlier this year (Exhibit 16).

12 November 2023 14
Goldman Sachs US Economics Analyst

Exhibit 16: We Expect the First Rate Cut in 2024Q4, Though Insurance Cuts at Some Point Are Also a Risk; Market Pricing Is Now Slightly
More Dovish Than Our Views, Though Much Less So Than Earlier This Year
Percent Fed Funds Rate Scenario Analysis Percent Percent Fed Funds Rate Percent
8 for Next Two Years 8 8 8
Higher for Longer / No Cuts (20%) GS Baseline Path
7 GS Baseline / Gradual Cuts (35%) 7 7 GS Probability-Weighted Average Path 7
Growth Scare / Insurance Cuts (20%) Market Pricing
Recession / Faster Cuts (25%)*
6 6 6 6

5 5 5 5

4 4 4 4

3 3 3 3

2 2 2 2

1 1 1 1

0 0 0 0
Mar-22 Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 Mar-25 Mar-22 Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 Mar-25
* This is a probability of a recession happening at any point over the next two years. Our 12-month recession probability is 15%.

Source: Goldman Sachs Global Investment Research

Risks to Our 2024 Outlook

Two key risks remain top of mind. The first is geopolitical conflict and the risk of a spike
in oil prices. While possible, we think this would more likely be a setback in the inflation
fight than a gamechanger. We doubt that a spike in oil prices alone would take us back
to the inflation environment of late 2021 and 2022, when price spikes were widespread
across many commodities and other goods in short supply. After all, the US economy
saw many large fluctuations in energy prices in the twenty years before the pandemic
that had much more limited effects on core inflation and inflation expectations.

The second risk is that something could “break” in the abrupt transition to a higher
interest rate regime. We think most of the impact of higher interest rates is already
behind us, and the impact yet to come—in particular from the looming corporate debt
maturity wall—will be modest. Our analysis suggests that the costs of an unwinding of
other potential risks—valuations in financial markets, unprofitable firms in the corporate
sector, and large deficits in the public sector—would be meaningful but manageable. A
major reason is that if any of these risks materialized as a major growth headwind next
year, the FOMC would likely feel at liberty to cut in response in a way it would not have
last year, and it will have plenty of room to do so. In fact, if higher rates cause problems
and the Fed cuts in response, investors might well revise their expectations of future
interest rates part way back down, which would provide further relief.

David Mericle

12 November 2023 15
Goldman Sachs US Economics Analyst

The US Economic and Financial Outlook

(% change on previous period, annualized, except where noted)
2022 2023 2024 2025 2026 2027 2023 2024
(f) (f) (f) (f) (f) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

OUTPUT AND SPENDING

Real GDP 1.9 2.4 2.1 1.9 1.9 2.0 2.2 2.1 4.9 1.6 1.8 1.6 1.7 1.9
Real GDP (annual=Q4/Q4, quarterly=yoy) 0.7 2.7 1.8 1.9 1.9 2.0 1.7 2.4 2.9 2.7 2.6 2.4 1.7 1.8
Consumer Expenditures 2.5 2.2 2.1 1.9 1.9 2.0 3.8 0.8 4.0 1.9 1.9 1.9 1.9 1.9
Residential Fixed Investment -9.0 -11.5 -1.5 2.6 3.2 2.4 -5.3 -2.2 3.9 -7.0 -4.0 1.0 2.0 2.0
Business Fixed Investment 5.2 4.2 2.2 2.7 3.7 3.6 5.7 7.4 -0.1 2.9 2.8 2.1 0.9 1.2
Structures -2.1 11.4 1.7 0.1 3.2 3.0 30.3 16.1 1.6 3.3 4.0 0.8 -6.0 -6.0
Equipment 5.2 0.1 1.9 3.0 3.5 3.2 -4.1 7.7 -3.8 2.9 2.0 2.0 2.5 2.8
Intellectual Property Products 9.1 4.5 2.9 3.9 4.3 4.5 3.8 2.7 2.6 2.5 2.8 3.0 3.5 4.0
Federal Government -2.8 4.1 1.3 0.0 0.0 0.0 5.2 1.1 6.1 2.0 0.6 0.0 0.0 0.0
State & Local Government 0.2 3.6 1.3 0.9 1.0 1.0 4.6 4.7 3.7 2.0 0.0 0.1 0.9 0.9
Net Exports ($bn, '17) -1,051 -932 -899 -895 -900 -887 -935 -928 -938 -926 -907 -902 -894 -892
Inventory Investment ($bn, '17) 128 47 55 60 60 60 27 15 81 64 60 50 50 60
Industrial Production, Mfg. 2.7 -0.4 1.8 3.1 3.4 3.4 -0.3 0.3 0.0 1.7 2.1 2.3 2.7 3.1

HOUSING MARKET
Housing Starts (units, thous) 1,551 1,388 1,335 1,430 1,515 1,535 1,385 1,450 1,359 1,358 1,335 1,325 1,325 1,355
New Home Sales (units, thous) 637 686 723 771 781 858 638 691 724 690 708 708 728 747
Existing Home Sales (units, thous) 5,081 4,093 3,838 4,244 4,372 5,005 4,327 4,250 4,023 3,773 3,740 3,796 3,863 3,952
Case-Shiller Home Prices (%yoy)* 7.5 3.5 0.6 3.8 4.9 4.9 2.3 -0.2 2.2 3.5 3.1 1.6 0.2 0.6

INFLATION (% ch, yr/yr)

Consumer Price Index (CPI)** 6.4 3.3 2.5 2.3 2.4 2.3 5.8 4.1 3.6 3.2 3.0 2.6 2.5 2.5
Core CPI ** 5.7 4.0 2.7 2.5 2.5 2.4 5.6 5.2 4.4 4.1 3.7 3.1 3.1 2.8
Core PCE** † 4.9 3.3 2.4 2.2 2.1 2.1 4.8 4.6 3.9 3.4 2.8 2.5 2.5 2.4

LABOR MARKET
Unemployment Rate (%)^ 3.5 3.8 3.7 3.6 3.6 3.6 3.5 3.6 3.8 3.8 3.7 3.7 3.7 3.7
U6 Underemployment Rate (%)^ 6.5 7.0 6.8 6.8 6.8 6.7 6.7 6.9 7.0 7.0 6.8 6.8 6.8 6.8
Payrolls (thous, monthly rate) 399 222 115 80 75 75 312 201 233 142 130 130 100 100
Employment-Population Ratio (%)^ 60 60.3 60.2 60.1 59.9 59.7 60.4 60.3 60.4 60.3 60.3 60.3 60.3 60.2
Labor Force Participation Rate (%)^ 62 62.6 62.5 62.3 62.1 61.9 62.6 62.6 62.8 62.6 62.6 62.6 62.6 62.5
Average Hourly Earnings (%yoy) 5.3 4.3 4.0 3.6 3.6 3.6 4.5 4.3 4.3 4.2 4.2 4.1 3.9 3.8

GOVERNMENT FINANCE
Federal Budget (FY, $bn) -1,375 -1,700 -1,700 -1,900 -1,900 -2,050 -- -- -- -- -- -- -- --

FINANCIAL INDICATORS
FF Target Range (Bottom-Top, %)^ 4.25-4.5 5.25-5.5 5-5.25 4-4.25 3.5-3.75 3.5-3.75 4.75-5 5-5.25 5.25-5.5 5.25-5.5 5.25-5.5 5.25-5.5 5.25-5.5 5-5.25
10-Year Treasury Note^ 3.88 4.30 4.30 4.25 4.25 4.25 3.48 3.81 4.59 4.30 4.60 4.60 4.50 4.30
Euro (€/$)^ 1.07 1.06 1.15 1.15 1.15 1.15 1.09 1.09 1.06 1.06 1.08 1.10 1.11 1.15
Yen ($/¥)^ 132 150 135 135 135 135 133 144 149 150 152 154 152 135
* Weighted average of metro-level HPIs for 381 metro cities where the weights are dollar values of housing stock reported in the American Community Survey. Annual numbers are Q4/Q4.
** Annual inflation numbers are December year-on-year values. Quarterly values are Q4/Q4.
† PCE = Personal consumption expenditures. ^ Denotes end of period.
Note: Published figures in bold.

Source: Goldman Sachs Global Investment Research

12 November 2023 16
Goldman Sachs US Economics Analyst

Disclosure Appendix
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