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Goldman Runs Reality-Based Simulation, Sees Far Lower 2.5%-3.0% GDP Growth In H2 2011-H1 2012

Tyler Durden's picture




 

This is about as close as we are going to get an admission from Goldman that growth is about to fall off a cliff. The full announcement will come within the next couple of weeks (assuming Goldman is unsuccessful in its 4th upcoming crude Sell recommendation). "If sustained, the recent oil price increase could thus shave around ½pt off growth for the next two years. Moreover, we showed that further increases from current levels could have increasingly detrimental effects on growth, as “nonlinear” effects might set in as oil prices reach new multi-year highs." And "In particular, the simulations suggest that growth in the second half of this year and the first half of 2012 would only range between 2½% and 3%, well below our forecast of 3½-4%. The implied effect on Q2, however, is small given the lags involved, and the gas price drag weakens notably in the second half of 2012." Must. Not. Cut. Q2. GDP.

From Sven Jari Stehn of Goldman Sachs:

Gasoline and Growth: Gauging the Hit (Stehn)

The sharp rise in energy prices has emerged as the most important downside risk to our US growth outlook. Relative to our forecast—which already assumes a significant increase in energy prices—West Texas Intermediate (WTI) crude oil prices are now up by around 25%. Brent crude oil prices have risen even more sharply.

Our analysis suggests that the crude oil price surge could act as a significant drag on growth. Specifically, our estimates imply that a 10% increase in WTI prices—if sustained—could shave around 0.2 percentage point (pt) off real GDP growth for two years; that is, the level of real GDP would be lower by 0.2% and 0.4% after one and two years, respectively. (For details, see Sven Jari Stehn, “Rising Oil Prices—So Far, Only a Modest Hit to Growth,” US Daily, February 23, 2011.) If sustained, the recent oil price increase could thus shave around ½pt off growth for the next two years. Moreover, we showed that further increases from current levels could have increasingly detrimental effects on growth, as “nonlinear” effects might set in as oil prices reach new multi-year highs. (See “Oil, Growth, Inflation, and the Fed,” US Economics Analyst, March 11, 2011.)

It may, however, be preferable to focus on the growth implications of surging gasoline rather than crude oil prices. First, gasoline prices have a more direct effect on economic activity because by far the most important economic use of crude oil in the US nowadays is as transportation fuel. Second, it is much clearer which gas price to use—namely the US average retail gas price—than which crude oil price to look at. Finally, it currently makes an important difference whether we look at gas or oil prices. Seasonally-adjusted retail prices are now higher than their previous peak in July 2008, having risen significantly more than one would have expected based on the increase in WTI prices. (This is less clear for Brent prices, which have increased more sharply than WTI prices.)

In today’s comment we therefore modify our existing model to analyze the growth effect of gasoline rather than crude oil prices. Specifically, we construct a quarterly model that explains the (annualized) growth rate of real GDP with the quarter-on-quarter percentage change in the average US retail gasoline price. To take into account that GDP growth is related to other factors than just gas prices, we also include as “control” variables the change in our financial conditions index and CPI inflation. As in previous work, we focus on a sample from 1985Q1 to 2011Q1. Once the model is estimated, we trace out the response of GDP growth to a shock in gas prices. (To do so, we need to take a view on the relative speed at which gas prices and growth respond to each other. Specifically, we allow growth to respond to gas prices within the same quarter but assume that gas prices do not react to growth within the same quarter. The results below, however, are robust to ordering growth and gas prices the other way around.)

The exhibit below shows the estimated response of (annualized) real GDP growth to a 10% gas price shock. For ease of comparison with our previous estimates, we also include the estimated response of growth to a crude oil price shock. The results suggest that a 10% gas price shock dampens GDP growth by around 0.3pt for two years—that is, the level of real GDP is 0.3% lower after one year and 0.7% after two years. Consistent with the view that gas prices matter more directly for economic activity, these estimates are larger than for a similar increase in crude oil prices.

What are the potential implications for our growth outlook? Relative to our December forecast—which was for a wholesale gasoline price forecast of $2.63/gallon at a 6-month horizon—gas prices have risen by approximately 20%. To gauge the magnitude of the downside risk to our growth outlook, we consider two scenarios.

First, we assume that the recent spike in gas prices mostly persists, giving back only 40% of its recent increase. (Note that this is the path taken by a “typical” shock in our statistical model.) Thereafter, we assume that the gas price will trend up in line with December’s commodity price forecast, which would be consistent with the current commodity price forecast under the assumption that Libyan oil production returns to the market within the next 12 months (see dashed black line in the exhibit below).

These assumptions would imply a substantial hit to GDP growth relative to our current forecast (see dashed black line in the exhibit below). In particular, the simulations suggest that growth in the second half of this year and the first half of 2012 would only range between 2½% and 3%, well below our forecast of 3½-4%. The implied effect on Q2, however, is small given the lags involved, and the gas price drag weakens notably in the second half of 2012.

Second, we assume that the recent run-up in gas prices is transitory and that prices fully revert to the December forecast path by the end of 2011 (see grey dashed line in the first chart above). These more benign assumptions imply a considerably smaller hit to growth. In particular, the simulations suggest that growth would range between 3-3½% in 2011H2 and 2012H1 (grey dashed line in second chart above). Given the assumption of a substantial drop in gas prices from current levels in this scenario, the implied growth rate exceeds our 3½% growth forecast in the second half of 2012.

Our analysis therefore suggests that the run-up in gas prices poses an important downside risk to growth, concentrated in the second half of this year and the first half of next year. Gauging the quantitative effect depends on whether the spike in gasoline prices is persistent or transitory.

 

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Wed, 05/04/2011 - 16:48 | 1240150 TruthInSunshine
TruthInSunshine's picture

Goldman raises Abacus to 'conviction buy list' from 'buy,' because Goldman cares about its valued clients and investors.

Wed, 05/04/2011 - 16:50 | 1240161 Yen Cross
Yen Cross's picture

Publicity Stunts work well?

Wed, 05/04/2011 - 16:59 | 1240187 Re-Discovery
Re-Discovery's picture

CNBC just had spot on Carlos Slim selling (or buying? I missed it) silver futures for last several weeks.  Anybody have thoughts on "the play".  Does he own a miner, i.e. hedge?

He has a lot of worthless fiat so it would be interesting to know what he's doing.

Wed, 05/04/2011 - 17:06 | 1240245 Pepe
Pepe's picture

He owns mines. Simply hedging his product price

Wed, 05/04/2011 - 17:07 | 1240258 sabra1
sabra1's picture

he's opening a chain of taco bells in pakistan!

Wed, 05/04/2011 - 17:20 | 1240269 Re-Discovery
Re-Discovery's picture

Just saw the knuckleheads on fast money discuss.  WOW!  What diarreha of the mouth!  They had NO insight on what his hedge is -- price level duration etc. --  understanding that he odes own mines.

One idiot actually said this two day negative move puts the lie to Silver as a currency substitute because "there is not enough of it!"  What a moron.  Wait, I'M the moron for watching.

Ben has 'em all brainwashed.  If you can't print more of it, it can't be currency!

Wed, 05/04/2011 - 17:30 | 1240372 Re-Discovery
Re-Discovery's picture

Now I am really pissed.  The ETF MD just says that they have all the silver in a vault on this stupid CNBC show.  Then asked if physical delivery is available and qualified his ass off.

They are lagging the trade (as always) but lying directly on the point of whether they have the silver.

Wed, 05/04/2011 - 16:59 | 1240194 mynhair
mynhair's picture

Bummer, someone at GS had to buy gas for that drive to the Hamptons.

Wed, 05/04/2011 - 17:02 | 1240215 Yen Cross
Yen Cross's picture

I'm short xag. CFD style. My 4 contracts are up 60K 46.6 @ 100sma Sunday. I have stated my targets.

Wed, 05/04/2011 - 17:05 | 1240220 Long-John-Silver
Long-John-Silver's picture

I've already seen a noticeable decrease in vehicle traffic and an increase in bicycles on the roads. All my friends are planning Staycations. I've already seen tents going up in backyards with wading pools so the kids can play beach vacation. The tourism industry is going to shit this summer along with all sorts of industry. Dominos Bitchez!

Wed, 05/04/2011 - 17:11 | 1240286 mynhair
mynhair's picture

Even the Wif canceled her European Vacation this year.

Dammit, 2 weeks of baching it - gone forever.

Wed, 05/04/2011 - 17:25 | 1240333 TruthInSunshine
TruthInSunshine's picture

I've already seen a noticeable decrease in vehicle traffic and an increase in bicycles on the roads. All my friends are planning Staycations. I've already seen tents going up in backyards with wading pools so the kids can play beach vacation. The tourism industry is going to shit this summer along with all sorts of industry. Dominos Bitchez!

 

 

Blue Skies
Wed, 05/04/2011 - 17:06 | 1240229 Pepe
Pepe's picture

one of these days treasuries are going to be priceless. That is, can't price something no one wants

Wed, 05/04/2011 - 17:05 | 1240243 carbonmutant
carbonmutant's picture

No more growth without war...

Wed, 05/04/2011 - 17:31 | 1240391 css1971
css1971's picture

Tadaaaaa.....

 

Wed, 05/04/2011 - 20:41 | 1241393 AccreditedEYE
AccreditedEYE's picture

+1

Wed, 05/04/2011 - 17:10 | 1240274 csmith
csmith's picture

He's dead Jim...I'm a doctor, not a miracle worker!

Wed, 05/04/2011 - 17:11 | 1240288 disabledvet
disabledvet's picture

I will always think lesser of The Squid for not telling me not only that he's going to eat me but precisely how he's going to do it.  "Billy Jack Squid," GS..."or you're a nothin'."

Wed, 05/04/2011 - 17:17 | 1240301 ivars
ivars's picture

There is no reason to think gas prices will not go up.

By the way- some proof that silver is crashing for now ( and to 30):

http://www.bloomberg.com/news/2011-05-04/silver-has-biggest-three-day-de...

 

Wed, 05/04/2011 - 17:21 | 1240318 Bazooka
Bazooka's picture

Ok, so Gold and Silver are acting still like the equities....when equities fall, gold and silver fall and vice versa.

This sync is why im not convinced that Gold and Silver are safe havens, rather they are another pair of equities. If stocks were declining, why didn't Silver and Gold rush up since everyone perceives them as safe havens?

The dollar has nearly everyone spitting on it...but to me, what a ripe chance to buy the USD in the form of UUP. When dollar reverses, and it will, as negative sentiment against it is stretched tighter than any rubber band, it will spring and pounce up.

 

 

Wed, 05/04/2011 - 17:26 | 1240366 mynhair
mynhair's picture

Did you miss the recovery in miners today?  Confused over paper and physical still?

Wed, 05/04/2011 - 19:52 | 1241211 nodoctor
nodoctor's picture


I think you are right for the short term though eventually the decoupling will happen. I am in FAZ and ZSL right now looking for another 30 days in ZSL and maybe another year in FAZ.

Wed, 05/04/2011 - 17:36 | 1240417 buzzsaw99
buzzsaw99's picture

Helpless people on a subway trains scream "My God" as he looks in on them.

 

SQUIDZILLA!

Wed, 05/04/2011 - 20:45 | 1241405 AccreditedEYE
AccreditedEYE's picture

Before the end, The Squid will be responsible for more deaths than Cecil B. DeMille.... inflation adjusted of course.  

Wed, 05/04/2011 - 17:44 | 1240463 Eireann go Brach
Eireann go Brach's picture

Carlos Slim is a fat bastard!

Wed, 05/04/2011 - 21:49 | 1241631 Mark Noonan
Mark Noonan's picture

I just want to know - how do I get that job?  I mean, come on, how hard can it be to remain 3 months behind the curve on financial developments?  Its like getting a job predicting the winner of the 2011 Super Bowl.

Wed, 05/04/2011 - 23:43 | 1241920 dellbalboa
dellbalboa's picture

In other words, Goldman sachs will take a cut of a dollar for every gallon of oil, thanks to operations at ICE in London.

 

 

Thu, 05/05/2011 - 01:54 | 1242122 Jovil
Jovil's picture

Most people have put aside the tragedy in Japan and what that nuclear fallout means for them and for the rest of the world. Japan is a small island and with wind currents changing often the whole island is being complitely uninhabitable and every man, woman and child have a death warrant in a not too distant future. It is not only water, food, milk, etc. contaminated but everything is. Do I want to drive a new Honda built in Japan. No! If I was a mechanic would I be happy replacing a part on a Japanese car knowing that the contaminated that part came from Japan. No!

The supply line has been disrupted with many unfinished Japanese cars around the word in factories waiting for parts from factories that were partially destroyed. The same with LCD TVs, electronic components, etc. that can't be finished because they are awaiting Japanese parts. In July, it will be the first complete quarter since the tragedy that corporate results will reflect the drop in sales and profit and they will be forecasting a similar next quarter. Analysts live by those quarterly reports and with markets at a titering high, can come crashing.

I think you owe it to yourselves to check this out at lonerangersilver.wordpress.com

http://lonerangersilver.wordpress.com/2011/04/14/michael-ruppert-we-have...

 

 

 

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