Goldman Sachs, reacting to political developments, decided to cut its GDP forecast for 2022. The cut was a result of Senator Joe Manchin’s (D-WV) decision to reject the $2 trillion Build Back Better (BBB) proposal.
Manchin’s support is critical for the passage of the BBB in the deadlocked Senate. Once the BBB Is dead, President Joe Biden has few options remaining to jumpstart the economy.
Failure of BBB To Lead to Lower Economic Growth
On Sunday, Goldman Sachs said that the imminent doom of the Build Back Better bill made it adjust its numbers. The firm will lower its gross domestic product forecasts in 2022.
Specifically, Goldman Sachs adjusted its GDP forecast for the 1st quarter from 3% to 2%. Then, it will reduce its earlier 3.5% estimate for the second quarter to 3%.
Finally, its GDP forecast for the third quarter is down to 2.75%, 0.25% lower than its earlier 3% projection.
Goldman economists led by Jan Hatzius saw the effects of the BBB legislation’s rejection. Earlier, they said that they saw the passage of a modified BBB version having slightly better than even chances.
Because of Manchin, however, “the odds have clearly declined and we will remove the assumption from our forecast,” they concluded.
Manchin Caught The White House Off Guard
Manchin’s announcement last Sunday that he was not on board the BBB plan caught the White House off guard. This followed weeks of intense negotiations between Biden and the West Virginia senator.
Now, the White House will have to deal with a bigger problem. It needs to come up with a modified bill that’s lower than the original BBB to assuage Manchin’s demands to reduce spending. However, critical funding for programs should also remain to appease progressives.
Goldman Also Sees Inflation To Reach 7% Next Year
In addition to its GDP forecast, Goldman is looking at inflation to go up as high as 7%. The firm sees the headline consumer price index to reach the 7% threshold before easing off.
Incidentally, Manchin alluded to higher inflation as one of his reasons to withdraw support for BBB. In addition, Goldman noted that the omicron variant will likely hog the headlines. This means long-term reforms will receive less attention
Also, Goldman said that the Federal Reserve likely assumed the BBB’s passage and incorporated it in their 2022 plans.
Now, they think that the failure of the BBB will provide some risk to the Fed’s plan to raise interest rates by March.
However, Goldman remains optimistic. It believes that Congress can still come up with an infrastructure program with smaller line items.
Despite the optimism, the firm remains guarded. The chances of a retroactive extension of the child tax credit “are less than even.”
Watch the Yahoo Finance video reporting that according to a Goldman Sachs strategist, the market’s response to Fed is ‘somewhat surprising’ all things considered:
What do you think of Goldman Sachs’ reduction of their GDP forecast? Do you think that the death of the Build Better Back plan will hamper economic growth?
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