Is the US economy growing too fast?

Sports betting's $45 billion future # # --------------------------------------------------------------- The key takeaways today: - Is the US economy seeing too much of a good thing? - Capital markets activity is likely to rise in 2024 - Sports betting in the US could become a $45 billion industry - Regional banks are back in focus - Investing in a post-modern 'super cycle' - Briefings Brainteaser: Which metal's price rose more than 100% last year? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Is the US economy growing too fast? Goldman Sachs Research's most [out-of-consensus global view]( over the past 18 months has been that US growth will remain solid alongside declining inflation. Recent indicators for GDP and jobs, however, have been well above our economists' estimates, [writes Goldman Sachs' Chief Economist Jan Hatzius](. Does that mean the economy and labor market are too hot for inflation to continue falling? Our economists don't think so — for several key reasons: - Other measures of US growth, such as gross domestic income, indicate a more muted pace of growth than the recent GDP print, showing 4.1% annualized in the second half of 2023. - Our economists “heavily discount” January's payroll gain of 353,000, which they say was boosted by seasonal factors. Those factors anticipate higher start-of-year job separation numbers than are likely in the current employment market, which is characterized by low turnover. Broader measures of labor market balance, such as the quits rate and Goldman Sachs Research's jobs-workers gap, are still trending lower despite the payroll strength. - Wage and price inflation data remain broadly favorable. Our economists point out that core PCE inflation has run at annualized rates of 1.5% over the past three months and 1.9% over the past six months — both of which are below the Federal Reserve's 2% target. Goldman Sachs Research acknowledges that data in the coming weeks could appear less friendly, but, even so, expects the year-on-year rate of core PCE inflation to fall further to 2.2% in the second quarter. - The first Fed rate cut will likely happen on May 1 (our economists had previously expected cuts to start next month), and there's a significant risk that policy rates won't change until June. By the time May arrives, our economists forecast that year-on-year core PCE inflation will be closer to the Fed's 2% target than they had previously expected at the time of the first rate cut. “In turn, this points to a potentially faster rate cut cycle,” Hatzius writes. Goldman Sachs Research projects five cuts this year and three cuts next year, which would take the funds rate down from 5.25–5.5% now to 3.25–3.5% in September 2025. --------------------------------------------------------------- Capital markets are open and risk appetite is poised to grow in 2024 There are growing signs that capital markets activity will increase in 2024, according to leaders from [Goldman Sachs Global Banking & Markets](. The increasing conviction of investors that the US economy will avoid a recession, and that the Federal Reserve and other central banks will start cutting interest rates, could boost IPO activity and corporate debt issuance in the year ahead. Equity investor engagement is improving. “The Fed's shift, and that of global central banks, will be a positive tailwind for the full suite of equity capital markets,” says Elizabeth Reed, global head of the Equity Syndicate Desk. The pipeline of IPOs is now growing, and she also projects increasing activity from financial sponsors and venture capital firms aiming to monetize their portfolios. [Convertible bond offerings]( meanwhile, have become “incredibly attractive” for companies to pursue. More than $200 billion of convertible debt matures between 2024 and 2026, indicating a need for refinancing of that paper. In high-yield bonds and leveraged loans, a key question is whether there will be an increase in mergers and acquisitions. Christina Minnis, head of both Global Credit Finance and Global Acquisition Finance, says her M&A colleagues have noted a backlog of transactions as well as growing confidence among CEOs. She points out that there's been a revival in demand for riskier, CCC-rated company debt. Financial sponsors, which need to return capital to limited partners and raise new funds, will likely be inclined to transact. Investment-grade company bond issuance may surge before the US election. That's because some borrowers may seek to get ahead of any volatility induced by the election in November, says Eric Jordan, co-head of Global Investment Grade Capital Markets. He points out that high yields on cash make it attractive to raise funds sooner rather than later, since funds raised from a bond offering can generate relatively high yields while the company waits to deploy the money. --------------------------------------------------------------- Why US sports betting could become a $45 billion business US sports betting has rapidly grown into a $10 billion industry since a 2018 Supreme Court decision allowed states to legalize the practice. Significant expansion could lie ahead, [according to Goldman Sachs Research](. Americans will legally spend $45 billion on sports betting each year once the market is mature, forecasts Ben Andrews, the head of leisure and travel research for Goldman Sachs Research in Europe, where legal sports betting companies have a longer history. “We expect growth to be driven by a combination of new state openings and a higher share of the consumer wallet being spent on sports betting over time,” he says. Noah Naparst, who evaluates sports betting companies for Goldman Sachs Asset Management, expects that parlays (which combine multiple wagers into a single bet) and in-game betting will make up an increasing share of the action. “The future of sports betting is the convergence of media and sports and betting,” Naparst predicts. “You're watching a basketball game in your betting app, and a player is about to take a free throw. The odds that he or she makes it pop up on screen, and the app asks, 'Do you want to do this bet or not?' That's where the industry is heading.” How significant will Sunday's Super Bowl be? Naparst says that while it shouldn't have an outsized effect on revenues, given operators' diversification, the game is “quite significant from a customer acquisition and visibility standpoint.” --------------------------------------------------------------- Markets and investors are worried again about regional banks For the second time in less than a year, markets are worried about the health of US regional banks. But the conditions around the latest sell-off look different to the stress that gripped the sector last March, says Goldman Sachs Research's [Ryan Nash on the Markets podcast](. A year ago, the crash of Silicon Valley Bank came at a time when many investors were worried about a potential hard landing in the economy. The failure led to worries of contagion across small- to mid-sized lenders, which are a large source of financing for commercial real estate. Today, while concerns about loans for office properties remain, multifamily housing has emerged as a new area of worry in specific markets, such as cities with rent controls. “Multifamily is clearly an area that we are watching, but I think this is much more specific to the markets and the property," says Nash. "This is much more of a cyclical issue.” Stocks in the regional bank index are down about 10%, prompted by concerns over potential losses in the commercial real estate sector, which has been hit by higher interest costs and a slow return to office. Over 70% of commercial real estate loans in the banking industry sit with banks that hold less than $150 billion in assets, says Nash. The risks of the sell-off spreading to larger banks is low, because larger banks are more diversified and set aside greater reserves to cover potential loan losses than smaller banks, Nash says. For regional banks, “we think the industry at this point is still in reasonable shape and we'll see that emerge as we move through 2024.” --------------------------------------------------------------- Investing in a post-modern ‘super cycle' While investors have a tendency to focus on the hot-button issues of the moment, there are longer-term structural changes in economic activity, policy, and society known as “super cycles” that can have a bigger impact on investment opportunities, explains Goldman Sachs Research's Peter Oppenheimer, chief global equity strategist and head of macro research in Europe. The current post-modern “super cycle” is likely to be characterized by still-high interest rates, greater regionalization and regulations, and aging demographics — all of which will lead to lower returns and the need for more active investment selection. “All of these things, I think, will create a very different environment for investors with a different range of opportunities relative, certainly to what we've seen, I would say, in the cycle since the early 1980s,” explains Oppenheimer, whose new book [Any Happy Returns: Structural Changes and Super Cycles in Markets]( looks at these long-term drivers for returns. “Most likely, over the medium term, it will mean lower returns at the index level for investors in equities because you've got a combination of a higher cost of capital [and] no-longer-falling interest rates,” he says on [Goldman Sachs Exchanges](. “It does mean that investors will need to be more selective and focus a lot more on, as we would call it, alpha and beta, differences within and across markets rather than, buying and holding markets and expecting valuations to drive returns.” --------------------------------------------------------------- Briefings Brainteaser: Pedal to the metal As countries seek more carbon-free and secure energy sources, which of these metals saw its price rise more than 100% over the past year? A) Cobalt B) Uranium C) Manganese D) Copper [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will redirected to external websites that Goldman Sachs does not own or operate. Goldman Sachs is not responsible for the products, services, or content provided on those sites. Please refer to each external website's terms, privacy and security policies for details. [Barron's]( February 2 Richard Lofgren, the Navy Admiral at the helm of Goldman Sachs' RIA Custody Business [CNBC]( February 2 Labor market is not as strong as payroll number suggests, says Goldman Sachs' Jan Hatzius (4:16) [Financial Times]( February 2 Op-Ed: The cycle vs the trend: Investors need to prepare for secular change [CNBC]( February 5 Our base case is Brent will remain in the 70-90 range, says Goldman Sachs' Daan Struyven (6:05) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The opinions and views expressed in this newsletter may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. The information provided in this newsletter is for informational purposes only and does not constitute a recommendation from any Goldman Sachs entity to the recipient. 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