Goldman Capitulates (Again): Downgrades Q1 GDP To 2.5%, Sees Outlook For H2 As "Messy"

Tyler Durden's picture

No QE3? Really? Oh yes, Zero Hedge 1, Goldman Sachs (who can possibly forget Goldman's shark jumping "New US Golden Age" report from December after all it took was one bad NFP print for Goldman to launch QE2 back in August?) 0 (here and here)

Just out from Jan Hatzius

1. With the first quarter now behind us, we have downgraded our Q1 GDP estimate to 2.5% from 3.5%. By itself, that’s not a big deal. Most indicators other than those that happen to go into the GDP bean count—in particular, virtually all business surveys and labor market indicators—continue to look solid and are probably a more accurate guide to the economy’s true strength. We believe that first-quarter GDP was held down by temporary factors, including poor weather and perhaps a bad draw from noisy data. Because temporary factors must eventually reverse by definition, this could mean a very strong quarterly GDP reading in Q2 (we are at 4%).

2. But the risks to our second-half GDP forecast of 4% also remain on the downside, and that’s more meaningful. We don’t see anything dramatic at this point, just a few weaker signals here and there. Gasoline prices are making new highs again, fiscal policy is starting to tighten a bit more aggressively, and a couple of indicators—specifically ISM new orders and consumer expectations—have softened a bit. So H2 is on downgrade watch.

3. The inflation news is also a thorn in our side. We still think the pass-through from commodity prices into core inflation will be very limited, and there is still a large amount of slack even after the 1-percentage-point drop in the unemployment rate over the past four months. But the core inflation data has clearly been a little firmer than we thought, with rent and owners’ equivalent rent leading the way. At some level, this sounds a bit odd because it’s hard to believe that the battered housing sector is a genuine source of upside inflation risk. Nevertheless, the risks to our forecast that core inflation will stay at 1% are on the upside.

4. Some Fed officials have reacted to the firmer inflation numbers by slightly hedging their earlier calls for continued accommodation, emphasizing that significant second-round effects and higher inflation expectations would not be tolerated, and implying that monetary policy may need to be tightened a bit earlier than they had thought a few months ago. We share this view; given the recent data, the risks are skewed toward a somewhat earlier date for the first rate hike than our current forecast of 2013Q1.

5. But other Fed officials go far beyond this and sound a lot more concerned about the possibility of an inflationary outbreak. There is now a serious split on the FOMC. We believe that the split partly boils down to a disagreement about the significance of the monetary base (currency plus bank reserves held with the Fed). The base has tripled from $800 billion before the crisis to $2.4 trillion now, mostly because of a huge increase in excess bank reserves in the wake of the Fed’s large-scale asset purchase program. Some Fed officials, as well as many investors, believe that the increase in the base represents a large inflationary potential, over and above the factors emphasized by the FOMC majority such as GDP, employment, wages, capacity utilization, and input costs. Thus, they take any acceleration in inflation or inflation expectations as a potential signal that the dreaded day has arrived, at a time when the Fed is still “feeding the fire” by continuing to buy Treasuries.

6. Some of this particular concern may be rooted in the traditional money multiplier theory, which holds that the availability of bank reserves is the key constraint on bank lending. It implies that banks will eventually “use” the excess reserves to make significantly more loans. This, the story goes, will lead to a sharp increase in credit creation and ultimately inflation.

7. We disagree with this story and so, we think, does the FOMC majority. [TD: which means this is guaranteed to occur] It stands and falls with the assumption that (bank) loans are financed by deposits subject to minimum reserve requirements, and are therefore “constrained” by the amount of reserves in the system. In reality, however, most bank loans have long been primarily funded from sources other than deposits subject to minimum reserve requirements, including nontransaction deposits, bonds, and commercial paper. This means that bank lending was not constrained by the availability of reserves even prior to the increase in excess reserves. Relieving a non-existent constraint cannot be important for credit creation or inflation. If so, the monetary base is essentially meaningless. (This does not mean that QE2 had no effect, but it does mean that the effect is much more limited and works through the impact of the Fed’s larger asset holdings on bond yields and financial conditions, not through the liability side of the Fed’s balance sheet and the monetary base.)

8. The upshot is that the growth news is a little worse, the inflation news is a little worse, and the risk that the Fed might tighten before early 2013 has gone up a little. None of this is dramatic, and we think the basic story of good growth, low inflation, and friendly monetary policy that we have been telling since late last year still stands. But it’s all a little messier than we would like.

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vas deferens's picture

Another very bullish sign for the market.

Ahmeexnal's picture

GLOBEX opens and silver shoots past $38.


CPL's picture

Until May.


Sell in May then go away.

tamboo's picture

maybe theyll beat you to the punch
and pull the plug on black friday part 2 april 29.

"The world is within a 20 trading day window of the greatest asset valuation collapse in history. Intuitive is the premise that without the multitrillion exnihilo ('out of nothing' - G) dollar bailout by the world's central banks, world equity/commodity valuations would be less than their current bubble value. This money printing is beyond any historical provided easy credit. The results will likewise be historical."

(page down to lammert's latest outlook)

WaterWings's picture

Just watched Fight Club again. Us space monkeys are proud. Tyler, we thank you.

bankrupt JPM buy silver's picture

I am in a fight club...and some guy in it asked me if I read ZH....fuck, if he only knew. (and yes I already violated rule 1 of FC)

Selah's picture

Dude, could you get some control over the morons that post on your blog?


slow_roast's picture

He is the moron that posts on his blog. 

random shots's picture

and the futures yawn...there most be some hidden message in the report that reads "sell on x date" <tin foil hat\off>

Long-John-Silver's picture

Silver is above $38 an ounce. Silver is an antiviral substance for Banksters after all.

Selah's picture


Yes, Silver has anti-bankterial properties...


Astute Investor's picture

I guess "messy" = 1500 target for SPX...

RobotTrader's picture

Funny how Goldman flip flops on its economic outlook, currency targets, etc.

They keep vibrating the traders like a huge sheet of sheet metal, constantly bucking them off, causing them to lose their grip on their positions.

Typcial PigMen shakedowns.

disabledvet's picture

they got a vibrator alright.  "it's all the buzz" from what i hear.

rocker's picture

My wife said the Hitachi Magic Wand I got here was the best gift ever. I get all the good stuff I need now. Trust me guys, buy your lady one. 

Hitachi knows how to Melt my little lady and they know how to Melt a City. Unlike GE, they really do it all.


lieutenantjohnchard's picture

reading you calling goldman flip flop artists is comical. you are the king of flip flops: fight the fed. don't fight the fed. jpm has a silver short position. the jpm short position is a myth. i'm itching to get short. i'll stay long until the summation index cracks. i'm an uber bull. i'm only long 30% of my investable money. gold is for dullards. i have gold stocks and gold coins. pigmen always win. leh and bear collapse. i could go on. but most zh veterans already know your low ways.

btw: who are the pigmen shaking down given market low volumes, and 1% of the population owning half the market?

JR's picture

Hatzius (Goldman Sachs) can say whatever he wants, of course; and it’s good for Zero Hedge to put it on.  It shows what’s going on - the king’s ministers are telling us what the king’s going to do. 

Is it the truth?  Probably not, since they keep changing it. And since when does the “nimble” Goldman hem and haw over what “Fed officials” say or worry over a split on the FOMC when Goldman is the NYFed, i.e., the Fed, i.e., the don of dons…

The interesting thing is, these are revisions of the projections that have yet to be realized, and the next message we get will be more projections that haven’t been realized yet.  It’s like telling you a year in advance who’s going to win the World Series,  the next month telling you, “We’ve changed our mind,” and as the series is being completed: “We kinda thought it might not work out the way it looked earlier.”

It’s best to remember Goldman is in position to make money; not to provide information for its competitors.

homersimpson's picture

Robo - the king of all flipfloppers. Makes me miss HarryWanger.. ok. maybe not..

reading's picture

Did Harry finally hit the junk quota?

Hulk's picture

They keep vibrating the traders like a huge sheet of sheet metal, constantly bucking them off, causing them to lose their grip on their positions

Excellent description....

SparkyvonBellagio's picture


knukles's picture

"With the first quarter now behind us, we have downgraded our Q1 GDP estimate to 2.5% from 3.5"

If one of my analysts or portfolio managers had ever made a statement like that, they'd have been ridiculed by their peers before they got reamed out by me or my boss, etc.

It says;
Now that the news and events have passed, we can pass on our new and revised forecast of those past events.

Moreover, having sat through thousands of meetings, phone conversations, luncheons and whatnots listening to Zero Value Added tripe such as this, what really takes the cake is that somewhere down the line, absolutely no matter what transpires, they will look at you with a straight face and say that they did indeed correctly forecast the outcome.
Because they've forecasted, redacted, retracted, modified, review and reissued so many prognostications that every base has indeed been covered.

Hence, no value added.

But, needs realize that one must indeed make it look as if one has worked hard for the rewards.

random shots's picture

Sell side people are just glorified sales reps. Like used car salespeople or those pushy tards who sell cell phones in mall kiosks.

nmewn's picture

"If one of my analysts or portfolio managers had ever made a statement like that, they'd have been ridiculed..."

LOL...we live in an age where important data points are revised downward 25-50% habitually, by those schooled in the statist art of Keynes slight of hand theory, in an "economy" where government transfer payments make up 30% of GDP, with a MSM that had their tattered pom poms replaced with funds from O-Care & "shovel ready" sumpin or other.

It's a brave new world where nothing is real except the debt.

Another list of those slurping at the trough;


max2205's picture

Now back to your regular programming schedule: BTFD!! Although I do thing this next new high could be the perfect bull trap suck in so be on your toes

disabledvet's picture

they say "never catch a falling knife."  i say "ride that greasy balloon, bitchez!"

Long-John-Silver's picture

Lets see....

QE3 is going to happen-Check.

Gasoline to $5-Check.

Food inflation-Check.

Democrats and Republicans continue the Spending Spree unabated-Check.


No pull back in Silver and Gold at all!

Todays Spike is Tomorrows Dip. Just buy and don't worry about how many FRN's you trade for it.

The Axe's picture

But no revisions to major SP companies, like a much lower GNP doesn't effect MMM or GE or UTX   wtf

Hedge Jobs's picture

here they go again, just softening the market up for QE3. It really is just getting too easy now. Just forget everything fundamental and trade the FED's reflation, deflation swings...until it all inevitably turns to shit . For anyone still grappling with these concepts i cant recomend the book "Dying of Money" by Jens O. Carsson enough. No link sorry

bob_dabolina's picture

GDP is a joke

GDP is gay

I want to know the definative answer to QE

duncecap rack's picture

Don't we all. I'm betting temporary pause. Then buy that chasm.

TemporalFlashback's picture

"...the risks are skewed toward a somewhat earlier date for the first rate hike than our current forecast of 2013Q1."

That should read '2012Q1', right?

earnulf's picture

Wells Fargo is predicting rates will start rising in 2012Q1.

jkruffin's picture

I'm just gonna sit back and watch USD/JPY run up through 85 overnight.....the squeeze is coming on all the dollar shorts. Bill Gross will be trapped in his hedge.

B9K9's picture

Well, I'm still in the "no more QE camp". Take a look around - see how light the traffic is? More than anything else, rising gas prices are having a direct life-style effect. How much higher can they go before people really begin to wake up & learn/realize that their lives are being fucked over by a small group of chosen, oops, 'preferred' constituents?

Fish Gone Bad's picture

Traffic has been light, but then again, it has been spring break for various schools around me.

nmewn's picture

"Take a look around - see how light the traffic is?"

Noted the same...been like that for a couple months around here.

captain_menace's picture

rising gas prices are having a direct life-style effect

You've completely missed the upside psychological effect!

I no longer feel so lame for being a homebody.  Surely I'm not the only one soaking up this intangible?

bania's picture

just watching silver go through $38 late sunday night.  sweet dreams.

Misean's picture

It's gonna be entertaining, for at least a few minutes, when "Project 401K Bubble" implodes.

Long-John-Silver's picture

I remember everyone telling me that cashing out my 401k's and IRA's and paying the tax penalties was a big mistake. That was when Silver was $12 and Gold was $700. Now tell me who made the mistake?

Misean's picture

Yeah. I did similar. In 1999.

Jreb's picture

Did the same with my CDN RRSP's. A close relative told me I was insane. That was back at $17.00 spot.


My only regret is that I didn't sell my house and use the equity to do the same.... my wife woulda taken half anyways...

Yen Cross's picture

They are just buying time to rebalance their bond portfolio. Inflation!

booboo's picture

"But it’s all a little messier than we would like"

"Jeeves, is that a family of four embedded in the grill of the Bentley? wash that mess off before the guest arrive"

philgramm's picture

Thanks a lot.  Glenlivet all over keyboard

tickhound's picture

Now that the plane has landed, we are obligated to inform you of an increased chance for a mid-air collision.  Thank you for flying Goldman air... And should you choose to fly with us again, it is important to note that we disagree with this story, and so do most experts.

Note: The subject matter discussed does not necessarily reflect our own opinion, unless proven true, in which case we warned you that flying can be messy.

Yen Cross's picture

That was a good one! (Goldman/Boeing) merger on the squawk!