Another Friday Night Dose Of Squid Humiliation: Goldman Lowers Q2 GDP From 3% to 2%

Tyler Durden's picture

It is Friday night, which means that any bad and self-discrediting news from Goldman Sachs are due any minute. Sure enough, the squid does not disappoint: "Following another dose of disappointing economic data, we have cut
our Q2 growth estimate to 2% (annualized) from 3%.
We also have issued a
preliminary forecast for the manufacturing ISM in June of 52.0. At this
point, we still expect a bounceback in Q3 and beyond, but will need to
see significant improvement in the data over the next few weeks to
maintain that view." Zero Hedge's own ISM outlook is for a 48 print. And as we will comment on later, as JPM's Michael Feroli demonstrates, the fate of the economic pick up in Q3 is all up to car sales surging by about 58% on an annualized basis as predicted by IHS. Good luck with that. As we said yesterday, we expect Goldman to lower its H2 outlook to under 2% within a month, most likely following the next ISM miss and the disappointing NFP report due out in 2 weeks.

Full mea culpa, and we have at this point lost track how many in a row this is, from Goldman's economic team which has now lost all credibility.

Sizing the Fed’s “Zone of Inaction”

Following another dose of disappointing economic data, we have cut our Q2 growth estimate to 2% (annualized) from 3%. We also have issued a preliminary forecast for the manufacturing ISM in June of 52.0. At this point, we still expect a bounceback in Q3 and beyond, but will need to see significant improvement in the data over the next few weeks to maintain that view.

The deterioration in economic activity, on its own, would call for fresh monetary easing. Meanwhile, however, inflation has continued to run above our (and the Fed’s) estimates. In the latest installment of bad news on this front, the CPI excluding food and energy rose 0.29% in May.

The Federal Open Market Committee is therefore stuck between a rock (slow growth) and a hard place (higher inflation). We expect Chairman Bernanke to indicate at next Wednesday’s FOMC press conference that there is little prospect of either monetary tightening or monetary easing anytime soon.

We formalize the idea that the “zone of inaction” is wide by returning to our estimated Taylor rule analysis. Given our current forecasts, the rule implies that the appropriate federal funds rate is -0.6%, which seems broadly consistent with the Fed’s stand-pat stance. If this is correct, we would need to see about a ¾-percentage-point decline in the unemployment rate forecast or a ½-point increase in the inflation forecast for the rule to project any monetary tightening (including an announcement of asset run-off).

However, Fed officials seem even further away from renewed easing. Our analysis implies that it would take a 1¼-point increase in the unemployment rate forecast or a 1-point drop in the inflation forecast for additional easing moves.
More Deterioration in the Growth-Inflation Mix

The past week brought another dose of discouraging data on economic activity, especially in the manufacturing surveys for early June. Our rolling monthly MAP surprise score—a measure of data surprises—continued to decline, while our Current Activity Indicator (CAI) failed to regain momentum (Exhibit 1). Despite some encouraging signs of stability in the “hard” data, we have therefore shaved our second-quarter GDP estimate further to just 2% (annualized), from 3% previously.

The main fresh negative was a sharp decline in the New York and Philadelphia Fed surveys of monthly manufacturing activity in June. The Philadelphia Fed index fell to -7.7 in June from +3.9 in May, mirroring the drop in the New York Empire State index reported the day before to -7.8 in June from +11.0 in May. The Philly Fed reading is the lowest since May 2009. The sub-indexes of the report offered no silver lining, as the indexes for new orders, shipments and employment all declined. As the Japanese supply chain distortion in the auto sector can likely only explain some of this weakness, the disappointing surveys point to some downside risk to our expectation that the economy will accelerate into Q3. Based on these surveys and other information, our preliminary forecast for the ISM manufacturing index in June is 52.0.

On a somewhat more encouraging note, the “hard” data looked a little more stable this week. Although headline retail sales declined in May due to a further decline in the motor vehicle sector, core retail sales (excluding autos, gas and building materials) rose by 0.2% on the month. Industrial production increased slightly less than expected in May, but non-auto manufacturing output grew 0.6%, following a decline of 0.1% in the previous month. Finally, housing starts and building permits both rose in May. Although the month-on-month improvement is encouraging, overall both starts and permits show activity essentially flat at depressed levels.

Meanwhile, both consumer and producer price inflation surprised on the upside. The biggest concern from the Fed’s perspective is likely to be the sharp increase in core CPI inflation to 0.29% on the month. This print—the highest month-to-month increase since May 2006—pushed up the year-on-year core consumer price inflation rate to 1.5%. However, it is important to note that about half of the price increase in May was due to sharp gains in relatively volatile components like apparel, vehicles, and lodging away from home.

Lower Growth+Higher Inflation=No Fed Action

What are the implications of these developments for the Fed outlook? Our preferred tool for thinking about this question is our forward-looking Taylor rule, which describes how Fed officials have historically set the funds rate using their four-quarter-ahead forecasts of core PCE inflation as well as the expected unemployment gap (actual less “structural” unemployment). Moreover, we have adjusted this rule to take into account the Fed’s unconventional policies—including its “extended period” language and its asset purchase programs (“QE1” and “QE2”). Given this unconventional easing, our four-quarter-ahead forecasts for year-to-year core PCE inflation and unemployment imply that the “warranted” funds rate is -0.6%.

In this framework the FOMC pays roughly equal attention to changes in core inflation and unemployment. The weakness in activity data in recent weeks might thus broadly offset the higher inflation news in terms of their implication for the Fed’s warranted funds rate.

Sizing the “Zone of Inaction”

This framework can then be used to get a sense for how much the data flow would need to surprise—in either direction—to move Fed officials out of their comfort zone. To do so, we need to make two further assumptions.

First, we use our setup to identify a threshold above which the Fed might start to tighten. Assuming the FOMC moves in lumpy increments of 25bp, the model-implied funds rate could rise by about 100bp from its current -0.6% level before a tightening became warranted. This tightening could occur either via a hike in the funds rate or, more plausibly, via changes to the reinvestment of maturing/prepaid securities and/or the “extended period” language in the FOMC statement.

Second, we use our setup to identify a threshold for the model-implied funds rate below which the Fed might start to ease. Identifying this threshold is difficult, because it requires a view on the perceived costs of returning to unconventional easing. Prior to QE2, we estimated that because of these costs the FOMC was willing to accept a gap between the warranted and actual policy stance worth 100bps in the funds rate. Given the backlash against QE2 since then, these perceived costs might well have risen. We therefore believe that the threshold for further quantitative easing has risen, perhaps to 150bp.
Fed Unlikely to Move in Either Direction Soon

Given these assumptions and our estimated Taylor rule we can trace out by how much forecasts for core inflation and unemployment would need to change for Fed officials to move out of their “zone of inaction” (see Exhibit 2). Our framework implies that this zone is sizable and that much larger surprises—in either direction—are needed for the Fed to move.

For example, we would need to see about a ¾-percentage-point decline in the unemployment rate forecast or a ½-point increase in the year-on-year core inflation forecast for Fed officials to consider any monetary tightening (including an announcement of asset run-off). Conversely, it would take a 1¼-point increase in the unemployment rate forecast or a 1-point drop in the core inflation forecast for additional easing moves.

Our analysis therefore suggests that larger surprises than those seen in recent weeks are needed for the FOMC to move out of its zone of inaction. We conclude that the unexpected weakness in growth and uncertainty about the effect of temporary factors will keep policy and, most likely, policy communication unchanged for the foreseeable future.

The implication of this analysis for next week’s FOMC press conference is that Chairman Bernanke is likely to stay far away from indicating any changes in the policy stance. Most likely, he will be “balanced” by emphasizing both the disappointment in the activity indicators and the higher inflation data. So the press conference is unlikely to be pleasant for either the chairman or his audience.

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oogs66's picture

and sadly people want to keep buying stocks because they think Greece is solved and we can't 'double dip'? 

MarketTruth's picture

It is a double dip per se because REAL inflation has increased to approximately 8% yet GDP may only be up 2%, and thus the consumer is contracting.

Panafrican Funktron Robot's picture

Right, it's so not hard to figure out that a contraction is actually very likely by Q4, and Q3 is going to be a .8 - 1.3% print.  The man reason for the budget action delay is that government spending is the only one keeping the corpse animated.  Are we seriously not aware that even very mild austerity will put us GDP negative?  I'm not even arguing against it, it's obviously necessary, but this is not a have cake/eat it too scenario.  THOSE SCENARIOS DON'T ACTUALLY EXIST. 

Subprime JD's picture

LOL Thats a man baby



buzzsaw99's picture

Like they don't KNOW what will happen. The squid and JPM give orders to the fed. Pretending like they don't own the fedgub and fedres is disingenuous.

bigdumbnugly's picture

disingenuousness is their business.

their only business.

Thomas's picture

Speaking of not knowing, the other morning CNBC's Car Shill (LeBeau), came on with breathless "Breaking News" about Boeing: They project plane sales to top four trillion dollars over the next 20 years. Sure glad they got that timely prediction out in the nick of time.

mayhem_korner's picture

I actually think that's on the low side.  Given the worth of the dollar, that's something like three 777s and some patchwork 737s for Southwest.


eureka's picture

Spot On - the Bernank and the Blankfein were room mates at Ivy Ilk... 

- and we know WHO was the BITCH.

Problem Is's picture

Did they shine each others cue balls with sex wax??

it's a bitch being two bald fuckers in college...

gwar5's picture

Keynesian Multiliar Effect no longer works, either. 

luciusfargo's picture

The multiliar effect seems to work reasonably well, in the short term. The multiplier effect, on the other hand...


bob_dabolina's picture

Despite some encouraging signs of stability in the “hard” data

Made my laptop move.

homegr0wn's picture

This is clearly the best comment in this thread. I think many didn't understand the humor.

mayhem_korner's picture

We got it, dude.  Pointing it out makes us wonder if you're in the same room...

FOC 1183's picture

Funny thing is, 2 was the logical number 3 weeks ago. At this point, it's probably closer to 1.5. And Tyler's 48 ISM is probably about right, contingent on Chicago, Dallas and Milwaukee surveys. Otherwise it will be closer to mid-40's. (and fwiw, the 53 ISM in May correlates with 1.8 GDP; 1.5 goes with a sub-50 ISM)

LudwigVon's picture

So then GS says we are growing still. Up from Q1 1.9%? (which includes lots of gov't spending)

gigeze787's picture

Goldman Cuts GDP View to 2% as Economy Weakens

Long-John-Silver's picture

When do TPTB admit we are now in Great Depression II?


Great Recession, Great Depression: a sign of things to come

buzzsaw99's picture

Five years ago the S&P was at 1270. Now, after the death of FNM, FRE, the near deaths of C, AIG, GM, etc. we are back at 1270. Congrats everyone! WOOHOO! [bondz bitchez]

Mentaliusanything's picture

the near deaths of C, AIG, GM, etc. -  The lot of them are Now the same as Lazurus with a triple bypass. 

The walking dead - nothing learned - nothing changed - nothing conglomerates who hide in high castles of vanity.

But I get your point even if we are all shareholders in vain zombies

I did it by Occident's picture

PMs bitchez!

Gold up ~2.5 in past 5 years (nominally)

Silver up ~ 3.5 in past 5 years (nominally)


JLee2027's picture

What industries are "growing"? I'm still confused on this.



Mentaliusanything's picture

Think - Government spending on food stamps and various other growth industries created by debt nazis (why beat around the bush - Bush x 2).

without it and the "Wars you had to have" you would be well and truly pickin ya nose

ebworthen's picture

Porn, Raiders gear, meth, liquor, cigarettes, oppression.

Problem Is's picture

Guns, ammo, reload kits, generators, short wave radios...

Sunshine n Lollipops's picture

As Burn, Baby, Burnanke rubs his hands in wicked glee, cooing to his Mega-printer 9000, "Soon, my precious, soon."

Problem Is's picture

I saw The Bernank at Costco buying one of those wall mount air conditioners... Said he needed to keep the Mega-printer from overheating...

Had a pallet of ink cartridges, too...

Bernanke Buck Green they were...

mcarthur's picture

I've got some work to do sorting out fact from fiction but Standard was front running Goldman for a number of weeks on the copper bonded warehouse story coming out of China.

Seems Standard was ruining Goldmans position here so they got Bloomberg to pipe in to ruin Standards/FT's thesis. 

Long gone are the days when actual producer supply/consumer demand ruled.  We are now just left with smoke and mirrors in order to save speculator positions. 


Everyone should read up on the tin cartel to understand the ultimate outcome.  

LudwigVon's picture

any links or helpful info other than that suggestion?

Miles Kendig's picture

First, we use our setup to identify a threshold above which the Fed might start to tighten. Assuming the FOMC moves in lumpy increments of 25bp...

There is the real news from this release.  GS is now openly talking about introducing FOMC moves in increments <25bp whenever the economy strengthens.  Japan here we come as Goldman unzips and whips out the incremental increases of 10bp cock to see how badly everyone chokes on it before attempting the standard sized 25 cock. 

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Yen Cross's picture

 Friday night "Suction Cups".    Or better yet!  Sea of CORTEZ SQUID!?


  I like how those consumer confidence numbers were swept under the rug. (71.8 vs a projected  74.2?) "Sinatra" must be Replaying," Jack the Knife" in his grave!

PulauHantu29's picture

Well, do you want Wall Street GDP which includes Fat Mega-Bonuses...or do you want Main Street GDP? There is a massive abyss between.

Yen Cross's picture

You are a good poster, BTW.

Yen Cross's picture

 I love Z/H . Man the sun is coming up, and my 6hour Jet lag is a little bit easier!

   I hate that Pan pacific time change. BRUTAL!

MiningJunkie's picture

RIMM implodes; AAPL implodes; S&P implodes but basket of Yukon gold explorers continues to advance with ATC.V and KAM.V reporting continued stellar world-class drill core results. GLD continues to crank along near record high levels insulating portfolios from the 7-weeks of carnage. 1966-1982 saw U.S. stocks in a trading range of Dow 585-1024 but gold advanced from $35/oz. to $857 with about 1% of the money managers invested until it hit $500.

Downtoolong's picture

This is the constantly changing information they expect their clients and other market participants to use for trading and investing. Clearly it’s not the same information Goldman uses for its own trading and investing, otherwise, they could never book perfect trading quarters like they do. Clearly the information Goldman trades on is far different from what they feed us to use, which if we reacted to each time they spew it would leave us broke within a few years. I wonder what their information might be. Hey Maria Bartiromo, can you tell me anything about that? Anybody?

Hedgetard55's picture

They own the FED. They create the conditions they need to frontrun the system.

TexDenim's picture

I'm not offended by this. New data inputs = a new forecast. That's true even for the Goldman-Satans

LRC Fan's picture

Anyone can look at the data and retroactively say "things are slowing down" when every economic report misses huge.  Just read ZH headlines and you know that.  Unemployment is "stubbornly high" according to Ben himself and yet people pay GS to basically say the same thing?  Lol. 

Then they have the balls to say "if things change, we will update our forecast."  Basically, we forecast sunny skies, but if we look outside and see rain, we'll let you know. 

Just like all the downgrades of RIMM lately.  Where the fuck were they when the stock was at $70?  It's too late now, the easy money has been made shorting or selling it.  It's like looking at a box score of a baseball game and saying "the Yankees hitters are looking good lately" after they bang out 14 runs.  Thanks for the fucking insight. 

My point is, these "research calls" have no value, because you can't trade on them.  If an equity collapses 80% and then it gets downgraded, it could easily bounce back, or fall maybe a few % lower.  But again, the easy money was already made.