Goldman Sachs Global Economics Analyst Exhibit 4: The Boost From the Rebound in Real Income vs. the Drag From Financial Conditions Percent change vs. Dec. 2020 Percent change vs. Dec. 2020 Percentage points Percentage points 30 Household Disposable Income 30 2.0 Real US GDP Growth Impulse from GS FCI, 2.0 Transfers (Nominal) 3-Quarter Centered Moving Average 25 Other Income (Nominal) 25 1.5 1.5 20 Inflation 20 1.0 1.0 Real Disposable Income 15 15 0.5 0.5 10 10 0.0 0.0 5 5 -0.5 -0.5 0 0 -1.0 -1.0 -5 -5 -1.5 -1.5 -10 -10 -2.0 -2.0 -15 -15 -2.5 -2.5 Ja MarMay Ju SepNo JanMar May Ju Sep No Ja Mar MayJu SepNo 2341234123 n l v l v n l v 2021 2022 2023 2021 2022 2023 Note: The impulses assume that the FCI stays flat after November 15, 2022. Source: Goldman Sachs Global Investment Research But the most fundamental question is this: how can the Fed bring down inflation by 2 percentage points over the next year with only a ½pp increase in the unemployment rate (Exhibit 5)? Doesnt this fly in the face of the experience from prior high-inflation episodes—most notably the 1970s—that ended with a much bigger increase in unemployment? Our answer is that this cycle is different from prior high-inflation periods. Exhibit 5: We Expect Core PCE Inflation to Decline by 2pp by End-2023 With Only a ½pp Increase in the Unemployment Rate Percent change, USCore PCE Inflation Percent change, Percent US UnemploymentRate Percent year ago year ago 7 7 6 6 5 5 6 6 4 4 5 5 3 3 4 4 2 2 1 1 3 3 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Jan-24 Jul-24 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Jan-24 Jul-24 Note: Dashed lines indicate GS forecasts. Source: Haver Analytics, Goldman Sachs Global Investment Research The first reason why this cycle is different is that post-pandemic labor market overheating showed up not in excessive employment but in unprecedented job openings. As shown in Exhibit 6, job openings surged in 2020-2021 as employers sought to keep up with the strongest economic recovery on record amidst continuing Covid fears and exceptionally generous unemployment benefits. However, employment as a share of the labor force only rose to roughly the pre-pandemic level, not above. 16 November 2022 5