Goldman Sachs has cut its US 2022 GDP forecast again and warned of a sharp slowdown in growth

• Goldman Sachs has cut its 2022 US GDP growth outlook to 3.2%, from a 3.8% estimate a month ago.
• The US economy will see a sharp slowdown as the government's fiscal support fades, the bank said.

Goldman Sachs has again cut its forecast for US economic growth in 2022, predicting a sharp slowdown as the government's fiscal support fades and the impact of the Omicron coronavirus variant is felt.

The bank now expects US gross domestic product to increase by 3.2% for the year, down from its previous estimate of 3.8% made in December. That was already a reduction from a prior outlook of 4.2%.

"Growth is likely to slow abruptly in 2022, as fiscal support fades and, in the near term, virus spread weighs on services spending and prolongs supply chain disruptions," economists at Goldman Sachs led by Jan Hatzius said in a note Monday.

On average, government tax and spending support boosted people's disposable income by 5% above pre-pandemic levels last year, they noted. Even so, the uplift has dropped in recent months and will fade sharply from 2021 into 2022, Goldman said.

Goldman expects this decline to weigh on consumer spending and is a big reason why it expects GDP growth to falter this year.

"Following the lapse of the expanded child tax credit this month, we estimate that disposable income has now dipped below trend and will remain an average of 1% below the pre-pandemic trend in 2022—even after penciling in strong gains in labor income," its analysts said.

At the same time, Goldman lowered its forecast for the first quarter to 0.5% growth, from 2%.

"While the fiscal headwind will impact 2022 as a whole, Q1 may look especially soft, in part because the rapid spread of the Omicron variant has weighed on services spending and may prolong supply chain disruptions."

The quick spread of Omicron in the US has disrupted businesses, which were forced to scale back operations as employees fell ill.

Overseas restrictions due to Omicron could prolong supply-chain disruptions and interrupt domestic production, and in turn hold back inventory and exports, according to Goldman.

"We are assuming moderately slower growth in broader manufacturing and trade inventories, in part because Omicron has already caused a disruptive wave of worker absenteeism in the US and threatens to be more disruptive abroad, especially in China," the analysts said.

The virus also had an impact on US consumer spending on services such as restaurants, as the work-from-home trend proved more persistent.

"Spending on virus-sensitive services, like air transportation and food services, has declined sharply," Goldman's team said.

Even so, Goldman expects services spending will rapidly bounce back to its level before Omicron quickly, though it believes consumer spending overall will still be more on the goods side.