Amid tightening financial conditions, the US is facing headwinds going into next year and could see a significant slowdown in economic growth, according to Goldman Sachs.

“At this point, our central expectation is that financial conditions will shave about ¾pp from US real GDP growth over the next year; this is implied both by the simple assumption that financial conditions stay at the current level and by a [Financial Conditions Index] projection that uses GS forecasts for the funds rate, US Treasury yields, equity prices, credit spreads, and the dollar,” economists wrote in a note published this week.

“In addition, the impulse from fiscal policy will likely diminish significantly, regardless of the midterm election outcome. All told, we expect US growth to slow from 3½% now to a trend-like 1¾% in late 2019,” the economists forecast.

Though the slower growth will be painful, the economists noted that a slowdown is necessary to prevent an overheating of the US labor market. While inflation has not accelerated sharply, and wage growth has remained elusive, the unemployment rate has continued to fall.

“Despite the tightening in financial conditions, we, therefore, remain comfortable with our Fed call of a hike in December followed by quarterly hikes in 2019.”