Goldman Reality Denial Continues, Though Facade Is Cracking

Tyler Durden's picture

We predicted Goldman would be first to cut its Q1 GDP back in January. We were right.  We predicted Goldman would be the first to cut its Q2 GDP in late March (around the time we said Goldman will soon start pushing for QE3). So far, said prediction is being met with staunch denial. That said, we give Jan Hatzius at most 2-3 more weeks before the firm's 4% Q2 GDP is cut to 2.5% or lower. Denial: "In conclusion, the report is a disappointment, and suggests some
downside risk to our Q2 GDP forecast of 4%, but probably not as big a
disappointment as the numbers suggest on the surface."
Anger is next...We are looking forward to the bargaining part.

GS Skinny: Sharp Drop in Service-Sector Activity Index

MAIN POINTS:

1. The Institute for Supply Management’s nonmanufacturing index dropped sharply in April, to 52.8 from 57.3 previously, one of the larger drops in its history.  The new orders index fell particularly precipitously, down  11.4 pts—its biggest monthly drop in the 14 years of the survey—to 52.7.   The business activity index, the component most correlated with GDP growth, fell six points to 53.7, a reading suggesting moderate growth.

2. The employment index held up somewhat better, declining to 51.9 from 53.7 in March.  This is consistent with downside risk to consensus forecasts for payrolls on Friday (we forecast +175k, versus a +185k consensus).

3. While the basic message of the report is clear – decelerating service sector activity – we are very skeptical of the magnitude of the move.  In particular, the seasonal adjustments look odd.  For example, the non-seasonally adjusted orders index looks more stable than the seasonally adjusted series in recent years (on an NSA basis, the orders index fell from 63.5 to 60.0).  If we take the NSA data and apply a standard Census seasonal adjustment, we find a somewhat smaller (8.7pt) drop in new orders.  If the underlying seasonal processes are changing, that could be an additional factor affecting the size of the seasonal move.   In conclusion, the report is a disappointment, and suggests some downside risk to our Q2 GDP forecast of 4%, but probably not as big a disappointment as the numbers suggest on the surface.