Goldman Keeps Its NFP/Unemployment Estimates Unchanged: -25,000 And 10.1%, Says This Is A U- Not A V-Shaped Recession

Tyler Durden's picture

Goldman is known for changing its estimates within 24 hours of an NFP number. Today, there is no change, and it stays at -25,000, coupled with an estimation of the unemployment rate at 10.1%. Additional, some bearish observations on the US economy via Goldman uber economist Jan Hatzius, who is now convinced this is a U- and not a V-shaped recession, follow.

In the V-shaped cycles before 1990, the end of the recession was followed by monetary policy tightening within half a year or less.  In the U-shaped cycles since then, it took 2½ to 3 years.  Our expectation is that the current cycle will resemble the post-1990 cycles, as we expect Fed officials to keep short-term interest rates near zero in 2010 and, more likely than not, in 2011 as well.


Monetary Policy Implications of U vs. V

Last week’s US Economics Analyst argued that the recovery from the 2007-2009 recession has so far looked much more like the U-shaped recoveries following the 1990-1991 and 2001 recessions than the V-shaped ones following prior postwar downturns.  This is particularly true as far as the labor market is concerned; indeed, if anything the current recovery has been even more “jobless” than the two prior ones, despite the fact that it followed a much deeper downturn.  (We will get the January employment report on Friday at 8.30 Eastern Time; our estimate remains a 25,000 drop in nonfarm payrolls and a 10.1% unemployment rate, though the uncertainty is even larger than normal as we described in Tuesday’s daily comment.)

Today’s comment looks at monetary policy in U-shaped and V-shaped cycles.  The bald historical facts are in the chart below.  It shows the time lag between the end of the recession as defined by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) and the first increase in the federal funds rate, broken down into separate lags between (1) the recession end and the peak in the (3-month moving average of) the unemployment rate and (2) the unemployment peak and the first rate hike.

The contrast between the two types of cycles could hardly be greater.  In the pre-1990s cycles, each of the two lags averaged just a few months, for a total lag between the recession end and the first hike of less than half a year in every single case.  In contrast, in the last two cycles, each lag has averaged more than a year, for a total lag of 2½ to 3 years.

Our labor market and monetary policy forecasts essentially envisage another 1991 or 2001-style cycle.  We expect the unemployment rate to peak in the first half of 2011, 1½ to 2 years after the end of the recession.  Moreover, we see no rate hikes until the end of 2011.  If short-term rates rise in the first half of 2012, that would imply a total lag of 2½ to 3 years between the end of the recession and the first rate hike, very much in line with the experience of the past two cycles.

Of course, there are a number of risks to the view that this monetary policy cycle will resemble the last two.  On the side of an earlier hike, we can see three main ones:
1. As discussed more fully in last Friday’s piece, financial conditions have eased more sharply (after a considerably bigger tightening) in this cycle than in the last two.  This could translate into a more vigorous recovery in final demand and ultimately GDP than in prior cycles.  There are some signs that this is happening in core areas of domestic demand such as personal consumption and capital spending, although they are quite tentative.

2. The level of the funds rate is lower.  At present, the target funds rate is in a 0% to ¼% range, compared with a trough level of 3% in the early 1990s and 1% in the early 2000s.  With core inflation at roughly similar levels as in the early 2000s and about 1 percentage point lower than in the early 1990s, this implies that the current funds rate is lower not only in nominal but also real terms.

3. A number of Fed officials worry greatly about the risks to inflation, inflation expectations, or another asset price “bubble” if the funds rate stays near zero for an extended period, despite the low current level of inflation and the large output gap.  If this view gains greater currency within the committee, perhaps in the wake of an updrift in inflation expectations or a sharp recovery in risky asset prices, the FOMC might decide to hike sooner.  We do not expect such an outcome, but we certainly cannot rule it out.

However, there are also risks on the side of an even later hike than in the prior two cycles:

1. The output gap is much larger than in either one of the previous cycles.  A larger output gap implies that the Fed should give the economy far more “running room” than in previous cycles.  This is the main reason why our version of the “Taylor rule” still points to a deeply negative funds rate.

2. So far, we can attribute most if not all of the growth in final demand since mid-2009 to the expansionary impact of fiscal policy.  We therefore need a large acceleration in underlying final demand to offset the waning of the fiscal impulse.  We expect such an acceleration, but it is not a foregone conclusion.

3. Unlike in previous cycles, a tightening of monetary policy need not involve a rise in short-term interest rates, at least not immediately.  The Fed’s asset purchases are slated to end later this quarter, which could lead to a tightening of financial conditions to the extent that the Fed’s ongoing flow of purchases have held down mortgage rates and long-term interest rates more broadly.  Moreover, there is a debate over whether Fed officials should ultimately sell assets outright to shrink the Fed balance sheet, perhaps even in advance of the first funds rate hike.  We neither recommend nor expect this, but we also cannot rule it out.  If it did happen, this would likely tighten financial conditions significantly and thereby postpone the first hike in short-term rates.

Jan Hatzius


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Instant Karma's picture

An interesting read. Did I miss the part on the continuous shedding of jobs due to a deflationary spiral brought about by increasing unemployment, decreasing demand, and decreasing tax revenues, leading to higher tax rates.

A depression, not a cyclical recession.

Dr o love's picture

I'll take the under on the GS prediction of -25K.  They were busy shorting the market today IMO and will likely make a bundle when the S & P drops 50 handles tomorrow.  Who in their right mind would go clown long for the weekend given what's happened in the last 2 days? 

Gloomy's picture

This market is the Street holding government hostage. Either stop trying to regulate me and resume feeding me with easy credit or I'm going all the way down.

lawton's picture

It will be a double dip only because of trillions of dollars of fake money but they will have to admit its a depression after the next dip finally...

lawton's picture

Has anyone done the math on how the 800K+ job loss adjustment will affect the numbers ?

The real number is 1.7 million+ off but they wont do the other current 900K+ adjustment until a year from now I guess.


exportbank's picture

I don't think it will be V or U rather \______/

Anonymous's picture

that's a B from bathtub

deadhead's picture

how about





Lothar the Rottweiler's picture

And now even deadhead is pissing on us.  Wasn't the gov pissing on us enough for you, man? :-)

Anonymous's picture

The frying pan recession.

Rainman's picture

These boyz still have their rear view mirrors working......keying off the " past recessionary cycles ". 

They will never, never ever concede to the structural depression until all four tires have shredded. And so it is.... they'll just keep driving and constructing hunch recovery forecasts.

deadhead's picture

......keying off the " past recessionary cycles



QuantTrader's picture

goldman talking its book.  the V has already begun,  its just not a straight V


dow will finish year at 12,000.  too much liquidity.  hatzius can suck my u-shaped nuts



QuantTrader's picture

thanks.  i made the dow 11k call jan 15 2009.  granted there was a decent drawdown, but the result was nearly spot on.  


you gold bugs have no thesis if stocks dont inflate.

reading's picture

Wow, you're amazing...are you a real quant trader?  I mean wow.  


Ummm, btw how do you know who's a gold bug?

Anonymous's picture

Ahahah. Really? Reeeeeaaalllly?

Have you ever been on this site?

Recognition FAIL

Ignorance WIN

dnarby's picture


But if so, it won't be priced in dollars, it will be priced in some new currency.

All the old ones are dead paper walking.

lawton's picture

What ? I think we see dow 5000 before we ever see dow 12000 - 10 years or more from now....

Dr o love's picture

I think you have one too many zero's in that DOW 12000 prediction.

Anonymous's picture

Ssshhh, no one tell Leo.

Frumundacheeze's picture

It will be neither a U or a V, it will be a \____/\______________.

QuantTrader's picture

it wont be a U.  It will be a:


........('(...´...´.... ¯~/'...') 
..........''...\.......... _.·´ 

Anonymous's picture

The Zerohedge museum of fine arts....

jm's picture

Nice.  Lotsa artistry in that bird...

Thanks, I needed a good laugh.

DoChenRollingBearing's picture

Duly copied and emailed on to legions.  Well done!

Scarecrow's picture

I believe that's a F-U shaped recession! Nice!

Anonymous's picture

It's a trap.

Anonymous's picture

Herbert Obama Hoover

Anonymous's picture

A veeee recovery "___/\___"

10044's picture

it will be toilet shaped.

Anonymous's picture

It will be 'coffin' shaped.

Anonymous's picture

The letter they need to get familiar with is the letter L

as in the next drop will bottom and stay at a lower level


where Frugality is the new Reality

merehuman's picture

anon 218267 , nail on head.  

Squid-puppets a-go-go's picture

LOL yea, in what font exactly does a "U" look like \__________________/

Anonymous's picture

Someone please help me with this...If the FED keeps interest rates at near ZERO for 2010 and 2011 like this note says, isnt that a virtual guarantee for MAJOR INFLATION? I understand we have deflation now, but it seems like we are being set up so when we finally leave the deflationary spiral, we just enter into an inflationary one right after. What do you think?

Anonymous's picture

Who says it will ever recover? Every day that passes oil gets drained out of the planetary tank and with no economic activity, there is no funding for the supposed miracle that will replace it in 18 wheelers.

Planet Earth, sans oil, can support about 900 million humans. There are 6.8B now.

What a mess_man's picture

Hey a peak-oiler (i.e ultra-doomer!)  Man this community is great - like everyone is here now!

Anonymous's picture

It will be an IV recession.

Anonymous's picture

As the market tanks and all hell breaks loose again, the next round of Fed QE will be restrained at $6+ trillion (a nod to hawks). That's Hoover-level tight policy given this calamity (Great Depression only had a one-decade bubble, we had 3). So down we'll go again after a bear rally unless the Fed is willing to go ~ $15+ trillion with US sovereign to AA+.

Instant Karma's picture

Lets be honest: at this point, things are unravelling again. No one knows how far or how long the unraveling will go, or, over what time course. I don't believe this depression is comparable to the generic post-war recessions because of the collapse of the housing market, the banking system, and the job market. The sovereign debt explosion to buffer the economic collapse just complicates the time course of the depression. In short, there is no sign of a self sustaining recovery, although, some companies are doing well and have lots of cash and competitive moats (tech). But as the unravelling continues. people are forced to sell to cover margin calls and losses in other positions. So quality of a position doesn't matter in a sharp downdraft. People are forced to sell.

Anonymous's picture

And gold? They are forced to sell GOLD?!?! Jeezus.

Like zerohedge has... Not espoused, spam and bullets.

Anonymous's picture

Not a U, an eff-U.

Careless Whisper's picture

If you're going to reprint bullshit from Goldman then I think you owe it to the readers to include all the Goldman disclaimers.

JR's picture

Here’s some Goldman insight from Marc Faber “after his recent and widely disseminated quip on CNBC that ‘Obama makes Bush look like a genius.’" It's from Faber lashes out — again | | Feb. 3, 2010.

FT quotes Faber’s latest GloomBoomDoom market commentary on "how the US can get out of its debt trap." Says FT: “The irrepressible pundit concludes that the US has basically two choices: default on obligations or massively monetize US debts and reduce the debt through inflation.” Here's Faber:

The baleful reality is that big banks, the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed…..

During the recent quarter, for instance, the preponderance of Goldman Sachs’ revenues came from trading in bonds, currencies and commodities. But these profits were no evidence of Mr Market doing God’s work, greasing the wheels of commerce and trade by facilitating productive financial transactions.

In fact, they represented the fruits of hyperactive gambling in the Fed’s monetary casino – a place where the inside players obtain their chips at no cost from the Fed-controlled money markets, and are warned well in advance, by obscure wording changes in the Fed’s policy statements, about any pending shift in the gambling odds.

To be sure, the most direct way to cure the banking systems’ ills would be to return to a rational monetary policy based on sensible interest rates, and an end to frantic monetization of federal debt and a stable exchange value for the dollar.”

Anonymous's picture

What if the Fed tried to sell assets and no one was interested in buying?

Catullus's picture

I'm sure Marla is all over it.  It's really getting fun now.

AN0NYM0US's picture

From Jan Hatzius on December 28, 2009

"Hatzius, 41, estimates the economy will expand 2.4 percent in 2010, and his 2.5 percent first-quarter growth forecast is half the pace Maki anticipates...the Goldman team forecasts "subpar growth" next year because "employers will be reluctant to hire" and households will exhibit "a bias toward higher saving."

EconomicDisconnect's picture

The number tomorrow has to be a + print and thus it will be.  Rally time!!!!!