Goldman Slashes Economic Forecast, Cuts Q3 GDP To 2.5%, Sees Q2 Below Stall Speed

Tyler Durden's picture

Nobody could have foreseen this now typical Friday night bomb from the 200 West macroeconomic wrecking crew. Nobody. Well... "Here is the first official Q3 GDP downgrade, courtesy of JPM's Michael
Feroli. We fully expect every other clueless Wall Street lemming to
follow suit in minutes." But as long as the lemmings all move in a herd over the cliff, they will still somehow all get paid the same $5 million (of which 25% is cash and the rest is indentured cliff-vesting equity servitude) at the end of the year. Either way, can we all now agree that Goldman did indeed jump the shark in December, especially now that it sees Q1 GDP at below stall speed in real terms. So here it is: "Following another week of weak economic data, we have cut our estimates for real GDP growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from 2% and 3.25%. Our forecasts for Q4 and 2012 are under review, but even excluding any further changes we now expect the unemployment rate to come down only modestly to 8¾% at the end of 2012." Here is why Hatzius gets paid the big Bernankebux: "The “bugbear” is that we are still unsure about the precise reasons
for the slowdown in 2011 to date, which is sharply at odds with our
expectation at the end of last year that growth would accelerate in
2011
." And the punchline: "Our forecast remains no fresh monetary easing from the Federal Reserve, but the probability has risen. In particular, Fed officials would undoubtedly ease if the economy returned to recession—not our forecast, but clearly a possibility given the recent numbers." Our prediction is that when Bill Dudley's 2011 calendar is released in December, his first meeting with Jan Hatzius at the Pound and Pence will have taken place right.... about.... now.

From GS:

More Downgrades to Our Growth Forecasts

  • Following another week of weak economic data, we have cut our estimates for real GDP growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from 2% and 3.25%. Our forecasts for Q4 and 2012 are under review, but even excluding any further changes we now expect the unemployment rate to come down only modestly to 8¾% at the end of 2012.
  • The main reason for the downgrade is that the high-frequency information on overall economic activity has continued to fall substantially short of our expectations. In particular, our “bean count” for second-quarter GDP has deteriorated further and our monthly Current Activity Indicator (CAI) is showing growth of just 1.3% in June.
  • Some of this weakness is undoubtedly related to temporary factors, namely supply chain disruptions and (the temporary part of) the oil shock. But the slowdown of recent months goes well beyond this. One major concern is the anemic growth in domestic final sales of just ½% (annualized) in the first half of 2011. There is only one precedent in the postwar period for such weak demand growth outside the immediate vicinity of a recession.
  • We have no hard information about final sales in Q3 yet, but Friday’s preliminary consumer sentiment index for July from the University of Michigan fell to the lowest level since March 2009 (!) and is now back in territory normally associated with recession.
  • Our forecast remains no fresh monetary easing from the Federal Reserve, but the probability has risen. In particular, Fed officials would undoubtedly ease if the economy returned to recession—not our forecast, but clearly a possibility given the recent numbers.

Following another week of weak economic data, we have cut our estimates for real GDP growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from 2% and 3.25%. Our forecasts for Q4 and 2012 are under review, but even excluding any further changes we now expect the unemployment rate to come down only modestly to 8¾% at the end of 2012.

The main reason for the downgrade is that the high-frequency information on overall economic activity has continued to fall substantially short of our expectations. In particular, our “bean count” for second-quarter GDP has deteriorated further and our monthly Current Activity Indicator (CAI)—a broader and higher-frequency measure that takes into account 25 different indicators of monthly and weekly activity—is showing growth of just 1.3% (annualized) in June, with a pattern of deceleration through the second quarter (see Exhibit 1).

Some of this weakness is undoubtedly related to the disruptions to the supply chain—specifically in the auto sector—following the East Japan earthquake. By our estimates, this disruption has subtracted around ½ percentage point from second-quarter GDP growth. We expect this hit to reverse fully in the next couple of months, and this could add ½ point to third-quarter GDP growth. Moreover, some of the hit from higher energy costs is probably also temporary, as crude prices are down on net over the past three months. But the slowdown of recent months goes well beyond what can be explained with these temporary effects.

One piece of fresh evidence comes from the New York Fed’s Empire State survey for July, which showed another sub-zero reading for both general business conditions and new orders (see Exhibit 2). And while the Empire State is still clearly in mid-cycle slowdown territory, final demand growth has slowed to a pace that is typically only seen in recessions. This is illustrated in Exhibit 3, which shows that real final sales to domestic purchasers—that is, real GDP excluding inventories and net exports—has grown at an estimated rate of only ½% (annualized) in the first half of 2011. There is only one precedent for such a weak demand growth pace outside the immediate vicinity of a recession.

One key question in coming months is whether final demand recovers to the 2%-2½% pace that is probably necessary to keep GDP growth near trend and prevent the unemployment rate from rising more noticeably. Obviously, we have no hard information about Q3 in this regard yet, but Friday’s preliminary consumer sentiment index for July from the University of Michigan was highly discouraging. The index fell to the lowest level since March 2009 (!) and is now back in territory normally associated with a contraction in real consumer spending and overall final demand (see Exhibit 4). Admittedly, consumer sentiment does not have much forward-looking value, and it is possible that the extensive media coverage of the negotiations around the federal debt ceiling has depressed sentiment. If so, agreement on this issue—which we believe may be coming closer—could lead to a rebound in sentiment. However, we would probably need to see a substantial improvement to undo the dramatic message of Exhibit 4, and to avert further downgrades to our GDP growth estimates in Q4 and 2012.

Unfortunately, our confidence in the growth forecast remains relatively low. The “bugbear” is that we are still unsure about the precise reasons for the slowdown in 2011 to date, which is sharply at odds with our expectation at the end of last year that growth would accelerate in 2011. Logically, the explanation presumably has to involve a combination of a) unforeseen shocks from the Japan earthquake and the oil market, coupled with b) more vulnerability to these shocks, because c) the housing and credit market downturn is weighing on private-sector balance sheets for even longer than we thought. But the relative importance of these issues is exceptionally difficult to sort out, and it makes a great deal of difference for the outlook.

The weaker data on economic activity have clearly raised the probability of renewed monetary easing by the Federal Reserve. In his monetary policy testimony this week, Chairman Bernanke’s main argument against renewed easing was that inflation is now significantly higher than it was in the summer of 2010. Indeed, the core CPI for June released on Friday showed a pickup in the 6-month annualized inflation rate to 2.5%, clearly above the “mandate-consistent” rate of 2% or a bit less. However, we may well have seen the highest inflation figures. Exhibit 5 shows that underneath the surface, both the “median” and “trimmed-mean” indexes—statistically based measures of underlying inflation that may be preferable to the better-known core CPI—showed a notable slowdown. Therefore, we still expect core inflation to slow substantially on a sequential basis over the next year.

Moreover, if the economy returns to recession—not our forecast, but clearly a possibility given the recent numbers—Fed officials would undoubtedly ease anew even if inflation is close to their target. Indeed, Chairman Bernanke laid out the possible options for such a move in his monetary policy testimony this week, namely a change in the forward-looking language in the FOMC statement, a cut in the interest rate on excess reserves, and—last but certainly not least—an increase in the size and/or composition of the Fed’s balance sheet.

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baby_BLYTHE's picture

they're begging benny for more QE heroin 

HungrySeagull's picture

They know they want more, but how little is there to have?

66Sexy's picture

Goldman: they have the credibility of obama...

lips moving but dont hear what they sayin

Calvin Jones and the 13th Apostle's picture

But the market drop hasn't been all that much.  It probably needs to get below 11,000 before The Bernank even warms up the helicopters.

baby_BLYTHE's picture

agreed.

No way they launch it right away. They will wait, just like they did between QE 1 and QE 2.

I, however, expect QE3 to exceed $600 billion.

We will see generational high inflation rates within the next few years.

Id fight Gandhi's picture

Sure thing!

Goog, cmg, Nflx, lnkd all momo tech will keep soaring from Benny bucks!

Sucks To work a real job for money. If you can find one.

ghostzapper's picture

but, but . . . . becky quick told us those greens shoots would be fully developed by now

Calvin Jones and the 13th Apostle's picture

The only green shoots are in The Oracle of Omaha's pants when Becky interviews him.

Helena Bonham-Carter's picture

There is ne'er a king christen could be better bit than I have been since the first cock.

slewie the pi-rat's picture

[Enter a Carrier with a lantern in his hand]

  • First Carrier. Heigh-ho! an it be not four by the day, I'll be
    hanged: Charles' wain is over the new chimney, and
    yet our horse not packed. What, ostler! 645
  • Ostler. [Within] Anon, anon.
  • First Carrier. I prithee, Tom, beat Cut's saddle, put a few flocks
    in the point; poor jade, is wrung in the withers out
    of all cess.

[Enter another Carrier]

  • Second Carrier. Peas and beans are as dank here as a dog, and that
    is the next way to give poor jades the bots: this
    house is turned upside down since Robin Ostler died.
  • First Carrier. Poor fellow, never joyed since the price of oats
    rose; it was the death of him. 655
  • Second Carrier. I think this be the most villanous house in all
    London road for fleas: I am stung like a tench.

First Carrier. Like a tench! by the mass, there is ne'er a king
christen could be better bit than I have been since
the first cock.

cosmictrainwreck's picture

ROFL.... slewie, ye have, prithy, out-done ye-self

Id fight Gandhi's picture

Only green shoots are the over grown grass on vacant homes rotting on the market.

ghostzapper's picture

green*.  damn first post i flubbed it. 

caerus's picture

Triple top...wait for it...

caerus's picture

lol..lthe colonel...with his wee beady eyes...

Troublehoff's picture

why... won't ... this wig... come off :)

dick cheneys ghost's picture

"The “bugbear” is that we are still unsure about the precise reasons for the slowdown in 2011 to date, which is sharply at odds with our expectation at the end of last year that growth would accelerate in 2011"................

 

they are "lying" about "lying"......

Fazzie's picture

 Im going to pull a number straight from my ass. 1.2 % GDP.

 There, I did it and you didnt have to read a thousand words of deceptive psuedo-science and charts.

 My analysis (no pun intended) is better than Goldmans braniacs who just had to be be paid record bonuses or we would sadly lose their talents, and heres why.

 

 1) Its honest. I admit that its just a wild assed guess.

 2) Its more accurate than Goldmans original forecast, in fact any number from 0 to 4 has about the same odds of being as good as GS finest.

 

   Now wheres my 5 million in taxpayer subsidised salary and bonuses?

Sambo's picture

In some dark smelly place...

cj51's picture

perfect. with y'all the way. btw, wheres my 5 mil.

 

The Real Fake Economy's picture

well said Fazzie.  been making a similar argument for years.  

knukles's picture

Still unsure...

Still fucking unsure?

You have all of the fucking information needed, all of the finest systems at your disposal, you work a firm populated by the smartest guys in the world (own words, by the way, smartest guys in the world) you produce financial results so consistently grand that you'd best be the smartest fucks in the whole fucking world or knee up to your asses deep in material confidential non-fucking-public information and....   

           ... you're still fucking unsure?

Does this not then place all financial analysis produced and disseminated by you into the real of suspect.  If not able to produce a reasonably intelligent forecast, let alone a cogent analysis of past, historical events, should the reader conclude that the forecast is indeed reflective an otherwise hidden agenda, which might be promoting your own singular interests?

Oh never mind, because with no doubt, your answer would be that you're fucking unsure.

slewie the pi-rat's picture

well, you wouldn't want him to be wrong wouldya?

Troublehoff's picture

I'm so sick of this BS.

Who thinks that a stress test indicating that several banks require more capital means anything in a world of FIAT.

'Capital' is pieces of paper allocated by misguided (at best) individuals. The banking system means shit.

 

I'm so sick and tired of this game. There are no rules in this game, just the rules that the fucking powerbrokers make up as they go along...and the markets still try to second guess, and factor, and speculate... but it's all BS...

 

There is no wonder. The space program is dead. Every fucking inch of this planet has been explored, and some of it might yeild commodities given investment. It's allready been bought and sold by the big coorporations, the human mind is sick and bored, and the exploratory spirit of mankind has been subverted.

Fuck this.

StychoKiller's picture

I hear ya!  Remember these 4 wordz:  All things MUST pass.

Caviar Emptor's picture

...blah blah blah earthquake in Japan....blah blah unusual weather patterns...blah blah those fat, lazy 'Merikans who refuse to shop on credit as they were programmed 

They won't have to push the Fed all that hard to get more juice. It's the only thing left supporting the whole financial construct, not just the stock market (which only reflects the anticipation of further monetary expansion). 

Last summer they were all rose-colored glasses about the economy. This summer they'll try to muscle the Fed by being gloomy. And when the U Mich reaches the low teens Ben will show up dressed as Mr Moneybags

 

nmewn's picture

Please don't tell me I'm going to have to exchange "less than expected" for "bugbear".

It doesn't have the same "synergy" ;-)

Fazzie's picture

 All that nauseatingly boring high toned economic pseudo-scientific jargon they love to use when crafting their 100 percent wrong forecasts, is replaced with "bugbear" when proven to be horseshit.

  "Gee we dont know exactly why we were so off, bugbear ya know."

  The real bugbear is these shit for brains asswipes pulling in the millions for these useless forecasts and fully expecting the next forecast to be believed as presumably "bugbear" free.

RobotTrader's picture

Don't worry, next week there will be a plethora of:

- Upgrades of chip stocks on "train is leaving the station" calls

- Forecasts of "V-shaped 2nd half recovery in tech spending"

- More "Extend and Pretend" for banks

- So many companies sandbagged their guidance, everyone will be "beating by a penny"

- Obama is definitely going to announce a huge stimulus or jobs bill

All this worry, yet the S & P 500 is less than a chip shot off its 3-year highs

 

nmewn's picture

"All this worry, yet the S & P 500 is less than a chip shot off its 3-year highs"

Looks like another double top to me.

Dr. Engali's picture

On a longer term chart it's a clear head and shoulders.

foxmuldar's picture

its too late for a summer jobs bill. Were still waiting for those shovel ready jobs from the first and second stimulus packages. lol

Id fight Gandhi's picture

There's plenty of shovel ready jobs. Look at all the shit laying around DC that needs shoveling.

Fazzie's picture

 Thats more of a backhoe job and they would hire illegals anyway.

Id fight Gandhi's picture

The wall St peeps will profit as the economy imploded. All the cash you can stuff away, and run to the hamptons.

Caviar Emptor's picture

It's all on Ben. If "Austerity" becomes fashionable, there's nothing supporting the market. Only around 10% of volume is ever held overnight. 75% is "program trading" (read HFT bots trading with each other to give the appearance of "action") and the rest is day traders. 

The Grifter's picture

Huge stimulus will happen next week, LOL.

Triple bogey in the works for Robo coming up.   FORE!

 

Yen Cross's picture

  Didn't GS cut the 2nd half to 2-2.3%? Even if the Q-3 numbers are so, they still undermine Chair Satans 3-3.5 % for the 2nd half... I love the White House /Wall Street divergence ...  Now we can see which side of the yield curve to play...

Libertarian777's picture

Yee of little faith.we will have 4.2% growth. I read it in Owebama's 10 year budget projections. Our president would never lie to us! He's the king! If we just leave him and the bernak alone, their $16 trillion in deficit spending ... I mean investment, over the next 10 years will bring dividends. I mean look at Libya. Our investment there is sure to bring many dividends to shareholders of companies like lockheed martin, XE, Boeing and our other 'made in America' companies. Not to mention all the goodwill we're building over there. Our high precision smart weapons don't explode if they detect civilians nearby. In fact our latest generation weapons can read thoughts and the DNA of children and instantly determine if theynwill become terrorists. You know what they say, a fatherless child just becomes a terrorist when they grow up so best to get em while they're young.

foxmuldar's picture

Unemployment remaining at 8.75 at end of 2012? I would like to think that if thats true, then hopefully it would be enough to get voters to send Obozo packing. However by then Obozo will have waved his magic wand and all the Illegals now in this country will be allowed to vote. Not that they don't already vote.

JLee2027's picture

Do you really the current unemployment is only 9.2%? They can juggle the numbers to say what they want, so yeah it's possible.

Libertarian777's picture

Unemployment will be 6% and CPI will be 2.0% exactly.

The new methodology will be
1. Unemployment = number of people who have resigned from full employment / (number of employed + voluntary resignations)
2. CPI : basket of goods will be adjusted to reflect changing consumer habits. When oil reaches $200 a barrel and milk is $12 a gallon they will be excluded, because people will be walking to work and drinking water so no inflation there. Once water hits $12 a gallon, we will adjust the basket to reflect the lower water consumption since if you not consuming the same amount, then it shouldn't be in the 'consumer' price index should it?

erg's picture

A first post here.

 

"Welcome aboard, I hope you like a fist in the eye."

 

Look, I'm already talking to myself.

 

Ben Berknucklehead

Ben Bernocchio.

 

The list is without end.

knukles's picture

You ever hear a tune in your head and pretty soon you swear everybody else is singing it too, even though you've been alone the whole time?

I'm still unsure about why everybody else who's not here started singing the same tune in my head.

Equally disturbing.

 

MobBarley's picture

You ever hear a tune in your head, start humming it, then turn on the radio

and there it is, at the exact bar you're humming?

Now the question is, is it that you're picking up the radio waves with

your body, or is your mind overpowering the universe into conformity

with your own thoughts, or is it that subconsciously you've always

known exactly what would happen where and when and you're gradually

growing more conscious of this having lived it all before thing.

http://www.youtube.com/watch?v=wXenEK0h6qg