Goldman Sachs’s Chief Economist Has Nailed Big Calls. Here’s His Next One.

Jan Hatzius, the firm’s chief economist, made an equally out-of-consensus, and prescient, call in the opposite direction in 2008.
Jan Hatzius, the firm’s chief economist, made an equally out-of-consensus, and prescient, call in the opposite direction in 2008.

Summary

Jan Hatzius was prescient on housing in 2008 and a soft landing in 2023.

Goldman Sachs is upbeat about the economy this year. Its economists see healthy growth of 2.3%, unemployment staying below 4%, and the probability of recession at just 15%—all more optimistic than the consensus. And they see inflation, excluding food and energy, continuing to fall, to a little over 2% (using the Federal Reserve’s preferred measure) by year-end.

Forecasts are a dime a dozen. Why care about Goldman’s? First, because its economists have been firmly in the soft-landing camp, which now looks prescient.

Second, Jan Hatzius, the firm’s chief economist, made an equally out-of-consensus, and prescient, call in the opposite direction in 2008. Back then, he correctly warned that mortgage defaults could cause a severe recession.

Nailing one big call might be luck; nailing two gets you a following. Hatzius is one of the most closely followed economists on Wall Street and in Washington.

Jason Furman, an economic adviser to President Barack Obama from 2009 to 2017, said, “Everyone on the White House economic team read Goldman obsessively, more than any other analyst." On X, Jared Bernstein, economic adviser to President Biden, recently called Hatzius “ahead of the pack.’’ Fed Chair Jerome Powell has met with him several times, according to Powell’s publicly released calendars.

It obviously helps that Hatzius’s forecasts have been pretty good. He’s one of a handful of economists to win the Lawrence R. Klein Award for Blue Chip Forecast Accuracy twice (in 2009 and 2011). While like most economists he was too low on inflation in 2021 and 2022, The Wall Street Journal ranked his 2023 forecast fifth out of 68 economists for accuracy.

Yet what really draws followers is the depth and volume of his team’s research. The team—12 economists in the U.S. (including the chief U.S. economist, David Mericle) and 29 globally—regularly publishes detailed, quantitative answers to topical questions such as how much artificial intelligence will raise long-term growth (a lot), the economic benefit of substituting masks for lockdowns (large), or what big union wage settlements mean for inflation (not much).

The team produces its own suite of economic indicators. These include a much-imitated financial conditions index that Hatzius and Bill Dudley, who was then his boss, developed in 2000 to gauge the full effect of monetary policy by combining interest rates, bond yields, stock prices and the dollar.

An eclectic approach

Hatzius, 55, was born and raised in Germany. His first loves were history and politics, he said in an interview, and he “was a little frustrated by the fact that anything goes in those areas. A lot is opinion. There’s not a lot of analytical frameworks."

So he studied economics at the University of Freiburg, then got his doctorate at the University of Oxford. He gave up on becoming a professor when he concluded his interests were too eclectic for academia. He joined Goldman in 1997, succeeded Dudley (who went on to become president of the New York Fed) as chief U.S. economist in 2005, made partner in 2008, chief economist in 2011, and director of research in 2020.

Hatzius’s eclecticism is essential to his approach. Dudley said Hatzius doesn’t yield to the temptation to be “a brand—the bullish brand or the bearish brand."

Hatzius is a fan (as am I) of the psychologist Philip Tetlock, who classifies experts either as hedgehogs, who know one big thing and see the world through that lens; or foxes, who know many things. “You have to be a little bit of a fox when it comes to analytical frameworks," Hatzius said. No single framework works for every economic or interest-rate cycle.

The big call

In 2007, many analysts dismissed the significance of subprime mortgage losses, which they compared to a bad day in the stock market. In a report that November, Hatzius called the analogy flawed. Citing research by the economists Tobias Adrian and Hyun Song Shin, he noted that stocks were mostly owned by “long-only" investors such as pension funds who “passively accept a hit to their net worth."

By contrast, mortgages are owned by leveraged institutions such as banks, investment dealers, hedge funds, Fannie Mae and Freddie Mac. For every dollar of losses, these investors would have to shrink their balance sheets to preserve their capital ratios. This was a key reason Hatzius projected weaker growth and a higher risk of recession in 2008 than the consensus.

After the recession, Hatzius again broke with the consensus in predicting, correctly, that bond yields would fall despite huge federal deficits. Drawing in part on the British economist Wynne Godley’s work on credit flows, Hatzius reasoned that public borrowing wouldn’t push up inflation or interest rates when private borrowing was so weak.

Hatzius has gotten calls wrong, in particular on Fed rate moves. Coming out of the pandemic, he missed the surge in inflation and was slow to realize how much the Fed would raise rates in response.

“You can be right about the big picture but still get the tactical calls wrong, especially where human or central banker behavior is concerned," Hatzius said.

What’s ahead

On the current big picture, Hatzius has remained emphatic that inflation can return to 2% without higher unemployment. In late 2022, his team defiantly borrowed the most dangerous words on Wall Street for the name of its 2023 outlook: “This cycle is different."

The overheated labor market would cool through reduced vacancies instead of higher unemployment, while a healing supply side would bring down inflation, the firm argued. In the end, the supply side rebounded even more than Goldman had expected, with growth in 2023 outstripping its optimistic forecast.

For 2024, Hatzius and company expect more of the same.

Many economists think the lagged effect of higher rates could yet trigger recession. But Hatzius thinks lags are misunderstood. The lags from rates on the level of output are long, but the lags on the growth of output are short, and are already behind us, he said. So inflation can continue to ebb alongside solid growth as supply recovers further.

The latest data haven’t been friendly to Goldman’s forecast. Retail sales were weak in January, and inflation was high. Goldman blamed that inflation on start-of-the-year price hikes that reflect past rather than future trends.

Housing costs also rose briskly. But in a 13-page report published Sunday delving into private rent data and Labor Department methodology, Goldman argued that January’s jump was anomalous.

There are still plenty of soft-landing skeptics around. Dudley has expected a sizable rise in unemployment and recession. But, Hatzius’s former boss acknowledged, “Things are definitely going Jan’s way."

Write to Greg Ip at greg.ip@wsj.com

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