Goldman: "Forecasters Need To Cut GDP Estimates A Lot Further"

From Jan Hatzius and the Goldman economic team. Check to you David Bianco: time for another S&P estimate raise?

• Over the last few months, the US economic indicators have shown a broad-based slowdown.  Such a slowdown around the middle of 2010 has long seemed likely given the dependence of growth over the prior year on the boost from the inventory cycle and fiscal policy.  Our forecast is that real GDP will grow at a 1½% (annualized) rate in the second half of 2010 and in early 2011, and the risks to it are tilted to the downside.
• But the forecasting community has only partially caught up with the deterioration in the numbers.  Last week’s FOMC statement suggests that Fed officials still expect the economy to grow at a slightly above-trend rate over the next year or so.  Likewise, most private forecasters predict that GDP will grow at roughly a trend rate in the second half of 2010 and a somewhat above-trend rate in 2011.  If our view is correct, substantial further downward revisions are coming.  In turn, these are likely to trigger downgrades to consensus earnings forecasts toward our strategists' more cautious views, as well as a return to large-scale asset purchases or other forms of "unconventional" monetary policy by the Fed.
• Will the economy in fact return to a technical recession, marked by declines in real GDP?  We think the odds are still against such an outcome, but the risk is a substantial 25%-30%.  In our view, this exceeds the likelihood of the trend/above-trend growth scenario envisaged in the consensus forecast.

Over the last few months, the US economy has shown signs of slowdown across a broad range of indicators:
 
1. GDP and its components.  We estimate that the Commerce Department will announce on Friday that real GDP grew just 1.1% (annualized) in the second quarter.  We do not yet have much “tracking” information for the third quarter, but we believe that the sparse data released so far are consistent with our forecast of a 1½% growth.
 
2. Business surveys.  At present, the ISM surveys for the manufacturing and nonmanufacturing sector—at 55.5 and 54.3, respectively—are still consistent with trend or above-trend growth.  However, other indicators such as the NFIB small-business survey and regional surveys such as the Philly Fed index look a lot softer.  We expect the ISM indexes to fall sharply in coming months, to around 50 in the manufacturing sector and to the low 50s in the nonmanufacturing sector.
 
3. Labor market indicators.  Both the establishment survey and the household survey of employment have shown a sharp slowdown in underlying job growth over the past few months.  Moreover, initial jobless claims have crept up in recent week and hit 500,000 in the latest week, with only some of this increase attributable to temporary factors.  Although we do not have a forecast for the August employment report yet, the early indications are that private sector job growth may have stalled (or possibly gone into reverse) in the last month.
 
A slowdown around the middle of the year has long seemed likely given the dependence of GDP growth since mid-2009 on the boost from the inventory cycle and fiscal policy.  Over the last four quarters, the swing from inventory liquidation to accumulation has contributed 1.9 percentage points to real GDP growth, and overall fiscal policy—federal, state, and local—has contributed a little over 1 percentage point to real final demand growth.  These two numbers are additive, which implies that almost all of the 3.2% growth in real GDP over the past year was due to temporary factors, and that final demand excluding the impact of fiscal policy grew by less than ½% over the past year.  (Final demand excluding the impact of federal fiscal policy but including the impact of state and local policy has declined slightly.)
 
Given these relatively easy-to-measure factors—and given that it is difficult to tell a compelling story for why underlying final demand growth should accelerate sharply from here—we find forecasts that do not look for GDP growth well below trend quite implausible.  If the inventory and fiscal effect in combination are zero, which is a relatively generous assumption in our view, underlying final demand growth would need to accelerate by more than 1 percentage point to reach even our 1½% growth pace for real GDP growth.
 
Nevertheless, most official and private forecasters still expect trend or above-trend growth.  Last week’s FOMC statement noted that “…the Committee anticipates a gradual return to higher levels of resource utilization…,” which we interpret as growth of around 3% coupled with a modest decline in the unemployment rate to 9% or a bit below over the next year.  And according to the August 2010 survey by Blue Chip Economic Indicators, Inc., the average private-sector forecaster still expects real GDP growth of 2.4% in the third quarter, 2.7% in the fourth quarter, and 3% in 2011 (on a Q4/Q4 basis), as well as a drop in the unemployment rate from 9.5% now to 8.8% at the end of 2010.  We believe that the GDP forecasts will need to fall by at least 1 percentage point and the unemployment rate forecast will need to rise by at least 1 percentage point.  As we discussed recently, such GDP revisions are likely to trigger downward revisions to the consensus forecast for corporate earnings toward our strategists' more cautious views (see Andrew Tilton, "Reconciling 'Micro' Strength with 'Macro' Weakness," US Economics Analyst, 10/32, August 13, 2010).  They are also likely to persuade the Federal Reserve to resume large-scale asset purchases or engage in other forms of "unconventional" monetary policy.
 
Will the economy in fact return to a technical recession, marked by declines in real GDP?  As explained recently, we think the odds are still against such an outcome (see Ed McKelvey, “Private-Sector Insurance against a Double Dip,” US Daily, August 12, 2010).  This is mainly because several components of economic activity that usually help drag the economy down during recessions have already suffered large hits and are unlikely to fall much further, if at all.
 
Despite this, we continue to believe that the risk of a renewed technical recession—defined as a return to quarter-on-quarter declines in real GDP—is an uncomfortably high 25%-30%.  In our view, this exceeds the likelihood of the trend/above-trend growth scenario envisaged in the consensus forecast.

Comments

[russki standart]

What we really need to do is cut Goldman into little pieces, and break up their monopoly, bitchez.

[DavidC]

russki standart,
Off track a bit but...

Why did your post require 'bitchez'?

Not only am I getting fed up with the use of the term (as, it appears, are others) but I still don't know what ironic or humorous significance it is supposed to have.

Given the erudition of Tyler et al, as well as many of the site posters, I would have thought its use unnecessary (as well as, in general at least, the use of words such as 'fuck', even though I use it myself when exasperated for example...). That could just be me though.

A previous respondent to my postings about refraining using 'bitchez' described me as being on a 'campaign' - I'm not, I'm just fed up with seeing it.

DavidC

[Bigger Dickus]

Bitchez, bitchez?

[snowball777]

And is it a plural form or some kind of French verb tense?

Vous bitchez.

Nous bitchons.

J'ai bitcher.

[Bigger Dickus]

J'ai bitché.

[bonddude]

It's only funny when Tina Fey says it.

Otherwise, not.

[russki standart]

Dear DavidC,

the use of the word Bitchez is part of the Fight Club motif, the 1999 movie featuring Brad Pitt (Tyler Durden), Helena Bonham Carter (Marla Singer) and Edward Norton.  The ZH motto, On a long enough timeline, the survival rate for everyone drops to Zero¨ was uttered several times by the Narrator, Edward Norton.

Fight Club's violence to serve as a metaphor for the conflict between a generation of young people and the value system of advertising. Even more, it speaks to the alienation that many young males feel towards a system that tries to feminize and domesticate. I highly recommend that you view the film.

The use of the word Bitchez allows some of us to inject a bit of levity into topics that are sometimes very deep, complex and disturbing, and is also a counter to the flaccid verbiage that passes for most financial commentary.

I hope this helps. If you do not like the word, please ignore it.

[Sam Malone]

I remember when ZH comments didn't blow...

[Ethics Gradient]

You might as well be telling the contributors to 4chan to exercise something other than their right arm.

Embrace the multifaceted nature of the universe and all of the subtleties therein.

You could also accept that if someone's opinion is not the same as yours that it doesn't necessarily make them wrong. If you can't do that then I suppose you could run for President.

[flacon]

We need to do the same the the government. 

[williambanzai7]

Double dip means double dipshits.

[DavidC]

It's not a double dip, it's the continuing depression.

Yes, that 'D' word, depression.

DavidC

[mephisto]

Exacly. And that's why GS conclusion is wrong. They say we can't go back into a technical recession because htte usual factors are already low. But that's nonsense, this economic situation doesn't compare with the standard start of a recession, the comparison is not sensible.

GS know this but they also know headlines 'GS predicts double dip' will not go down well in DC.

[jbc77]

Looks like the the shit is hitting the fan. Wonder when the negative GDP forecasts will be displayed? Thats where were heading, negative growth. Doesn't matter anymore. I'm just waiting for the "tail end events". Gotta love Kyle Bass - "Keynesian endpoint" - love that term.

[Bigger Dickus]

I loves me some nice double DDs. Apparently I am not the only one.

[russki standart]

Oh yeah,  please slap me in the face with a good pair of DD´s, anytime<G>

[VK]

Technically, GS should have been dismantled and buried 6000 ft under.

[dukeness]

Down, Bitchez!

[ZeroPoint]

When do we get to call it a depression?

[emsolý]

We live in a world of euphemism. Undertakers have become "morticians," press agents are now "public relations counsellors" and janitors have all been transformed into "superintendents." In every walk of life, plain facts have been wrapped in cloudy camouflage.

No less has this been true of economics. In the old days, we used to suffer nearly periodic economic crises, the sudden onset of which was called a "panic," and the lingering trough period after the panic was called "depression."

The most famous depression in modern times, of course, was the one that began in a typical financial panic in 1929 and lasted until the advent of World War II. After the disaster of 1929, economists and politicians resolved that this must never happen again. The easiest way of succeeding at this resolve was, simply to define "depressions" out of existence. From that point on, America was to suffer no further depressions. For when the next sharp depression came along, in 1937-38, the economists simply refused to use the dread name, and came up with a new, much softer-sounding word: "recession." From that point on, we have been through quite a few recessions, but not a single depression.

But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957-58. For since then, we have only had "downturns," or, even better, "slowdowns," or "sidewise movements." So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns." Such are the wonders of the "New Economics."

                       Murray N. Rothbard, Economic Depressions: Their Cause and Cure

(sorry for the lengthy quotation, but fits nicely in here)

[emsolý]

you can't have the technical argument both ways, and I would say, what we just had was a technical recovery... so the technical recession thingy is a bit misnomed.

[bugs_]

Could Goldman be right this time?

[MrTrader]

Jan Hatzius has no clue about micro economics. :=))))

[Grand Supercycle]

Updated S&P500 chart showing head and shoulders with target.

http://stockmarket618.wordpress.com

[Herry12]

Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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