Goldman cuts US GDP forecast after Manchin rejects Biden's bill

President's Build Back Better Act receives potentially fatal blow after weeks of negotiations

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Goldman Sachs Group cut its forecast for US economic growth after Joe Manchin, a senator from West Virginia, rejected President Joe Biden's $2 trillion tax-and-spend programme, leaving Democrats with few options for reviving the economic agenda.

The group said in a research note on Sunday that the likely failure of the Build Back Better legislation had prompted it to lower its real gross domestic product forecasts in 2022 to 2 per cent in the first quarter from 3 per cent previously, 3 per cent in the second quarter versus 3.5 per cent before, and 2.75 per cent in the third quarter from 3 per cent prior.

“We recently put the probability of a modified version of the [Build Back Better] legislation passing at slightly better than even but, in light of Mr Manchin’s comments, the odds have clearly declined and we will remove the assumption from our forecast,” Goldman economists led by Jan Hatzius said.

Mr Manchin’s announcement caught the White House off guard, as it followed weeks of negotiations between Mr Biden and the West Virginia Democrat, and a day after the Senate adjourned for the holidays.

The administration now must determine whether it can salvage some of the tax-and-spending bill to address Mr Manchin’s demands while maintaining the support of the rest of the Democratic caucus.

Goldman said its forecast for headline CPI to reach as high as 7 per cent in the next few months before easing means the inflation concerns Mr Manchin and others had expressed are likely to persist, making passage more difficult.

It also said the Omicron variant is likely to shift political attention back to virus-related issues and away from long-term reforms.

In terms of monetary policy, it said most Federal Reserve officials probably expected the Build Back Better Act or something like it to become law, and added that a failure to pass it “would introduce some risk” to Goldman’s expectation the Federal Open Market Committee will deliver the first interest-rate increase in March.

The note added there “is still a good chance” that Congress will enact a much smaller set of fiscal proposals dealing with manufacturing incentives and supply chain issues.

“There is also still a chance that Congress retroactively extends the expanded child tax credit, with some modifications, though we think the odds of this occurring are less than even,” Goldman said.

Updated: December 20, 2021, 4:48 PM