Goldman Tells Clients To Ignore "Controversial" Bad News, Sees 1.6% (Precisely) Recession Chance

Tyler Durden's picture

Goldman outdoes itself again. After Jan Hatzius has been banging the economic slowdown drums for days now, the firm's other prominent economist Andrew Tilton is out with a new report "Recession Forecast Models Back in Vogue", according to which the firm plugged in a few numbers into an overclocked iMac (appropriately equipped with the No Recession Ever ap), asked if there will be a recession, and the result was, stunning, "no way in hell." Most hilariously, the report contains the following stunner: "Typical recession forecasting models estimate a near-zero likelihood
that the economy has entered recession again, or that it will in the
near future...
The best news first: the model shows essentially zero probability that the economy is currently in recession.  Payrolls have generally been expanding in recent months and the unemployment rate has actually come down slightly.  This is unlikely to be a controversial conclusion for most market participants and so we will not dwell on it further." In other words, because everyone knows that there is really no trouble in the jobless arena, aside from some rumblings in the periphery that the real unemployment rate is, oh, 16.5%, Goldman sees no need to discuss this data point, as it is really completely irrelevant. Oh yes, and the model refs out if you assume in negative input. Moody's coupled with a dash of European stress tests anyone?

Andrew Tilton's complete joke of a report below:

Last week’s thoroughly disappointing macro data set prompted many market participants to wonder anew about the risk of a “double dip” in coming months.  One way to answer this question is via a quantitative “recession probability” model.

Typical recession forecasting models estimate a near-zero likelihood that the economy has entered recession again, or that it will in the near future.  But they suffer from a serious bias: most models use the slope of the yield curve as a forecasting variable, with a flat or inverted curve a classic warning sign of a slowdown or recession.  In the current environment of near-zero short-term rates, the yield curve must always have a positive slope, which normally implies a decent growth outlook and therefore leads such models to benign conclusions.

A forecasting model which leaves out the yield curve variable—reducing its accuracy under normal circumstances somewhat—and also adjusts for employment-related distortions currently estimates roughly a one-in-four probability that the economy will be in recession six months from now.  However, we would not place too much weight on any one model, as it is difficult to capture idiosyncratic factors (such as the impending fade-out of fiscal stimulus or the risk of heightened concerns about sovereign debt sustainability) in a model estimated on the last 40 years of US data.
Last week’s macro data set was thoroughly disappointing, including worse-than-expected readings on the two most important monthly economic indicators: the ISM manufacturing index and the employment report.  The ISM index dropped 3½ points and featured a seven-point decline in the “new orders” component, which has the most predictive power for future industrial activity.  As for the employment report, private-sector payrolls grew by only 83,000—less than needed to keep up with population growth over the long term—and the workweek shortened.  The unemployment rate declined to 9.5%, but only because a large number of people gave up looking actively for work; the overall employment-to-population ratio has moved halfway back to its late-2009 lows.
These disappointments have prompted many market participants to ask anew about the possibility of a “double dip” in the economy.  We interpret this below as the probability that the economy re-enters recession, roughly defined as two or more consecutive quarters of contracting real GDP.  (Conversations with clients suggest that some refer to any significant renewed slowdown as a “double dip,” even if it does not qualify as a full-blown recession.)  To provide some perspective on this question, we have dusted off a recession forecasting model that we employed in 2007-2008 (see “Recession Forecasting Models Flashing Yellow,” US Economics Analyst 07/39, September 28, 2007).
Our recession forecasting model contains the following variables: the slope of the yield curve (10-year vs 3-month Treasury yields), the recent change in the unemployment rate, nonfarm payroll growth, the recent change in equity prices, the year-over-year change in housing starts, and the ISM manufacturing index.  Generally, the labor market variables tend to be more significant as the forecasting horizon shortens, while the slope of the yield curve is the best predictor of a recession six to twelve months out.  Although versions of the model were calibrated to forecast recessions at different horizons, we focus here on a) the probability that the economy is currently in recession, and b) the probability that the economy will be in recession six months from now.  We estimate the model over the period from 1970 through mid-2009 using real-time rather than revised data (some adjusted versions, discussed below, begin in the late 1970s due to data availability).
The best news first: the model shows essentially zero probability that the economy is currently in recession.  Payrolls have generally been expanding in recent months and the unemployment rate has actually come down slightly.  This is unlikely to be a controversial conclusion for most market participants and so we will not dwell on it further.

More surprisingly, the model also shows a very low probability (1.6%) that the economy will be in recession six months from now.  Why so low?  The aforementioned labor market variables are one reason, but another important one is the positively sloped yield curve.  As the yield curve embeds expectations of future Fed policy, a flat or negatively sloped curve is a sign that the market sees Fed easing as likely—a classic sign of a slowing economy.
The problem, of course, is that the yield curve must be positively sloped in an environment of near-zero short-term interest rates.  Even if the market views the growth outlook as terrible, the Fed cannot cut rates, so risks to future short-term rates are one-sided.  In normal times, the current positively-sloped yield curve would imply a decent growth outlook, but this is clearly misleading.   It would be nice to find another yield-related variable without this bias, but none we have tried are nearly as significant.  Still, we can gain a sense of how important the bias may be—at the price of a moderate loss in accuracy under normal circumstances—by simply removing this variable from the model.  Doing so raises the six-month recession probability to 8.6%.
The employment-related variables in the model also suffer from some distortions at present.  Because of short-term Census hiring, nonfarm employment posted large gains through May and declined in June.  Private-sector payroll growth provides a less noisy barometer of underlying job market trends at the moment.  Another issue concerns the unemployment rate; because a large number of people have left the labor force (more than a million over the past year), it may not reflect the full extent of labor market weakness.  An alternative is the employment-to-population ratio.  Substituting these variables in our original model (with the yield curve) gives a recession probability of 6.1%.  So far, not so bad, but if we combine the yield curve adjustment and the employment-related adjustments, the model generates a 23.9% probability that the US economy will be in recession in six months’ time.  In other words, it suggests recession is not a base case, but is clearly more than just a tail risk.
Lest any reader take these forecasts too literally, we hasten to emphasize that any quantitative model can only capture a subset of the potential factors that could push the economy into recession—or keep it growing at a healthy pace.  The substantial changes in probability just from the changes discussed above illustrate the potential instability in models and the need for robust quantitative and qualitative analysis.  Our subjective assessment of recession probability leans to the high side of the model results.  This is partly because the model focuses on a fixed six-month horizon; the probability will naturally be higher over longer horizons.  In the current episode, the fade-out of fiscal stimulus, the wind-down of the inventory cycle, and the risk that sovereign default concerns further tighten financial conditions are all reasons for concern—but these are difficult to include in a quantitative model that covers only the last 40 years of US economic data.

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jkruffin's picture

Now this is the contrarion indicator,  this means sell and get out fast to all their buddies.  GTFO of the market fast.

Turd Ferguson's picture

Again, if Goldman says "buy" they are actually selling.

ATG's picture

Yesterday goombahs had their fun trashing Doug Kass for his low of the year is past comments; today the vampire squid.

We'll see who has the last laugh and profits as usual... 20:01

Dr. No's picture

Overclocked Mac?  These guys are strange.

Popo's picture

Further proof that the system will collapse because it must collapse.

Scooby Dooby Doo's picture


Dear Mr. Obama,
Comply with all things israeli or our financial engineers at Goldman NutSac will create the Greatest Depression of all times for you.

Warm regards,
Lord Blankenstein

ACjourneyman's picture

I would like to see a double dip recession and market crash just to get rid of this POS quasi bank, which adds absolutely no value to humanity in any shape or form.

SteveNYC's picture

Come on, it adds LOADS of negative value......that's something, right?

Mactheknife's picture

>the model shows essentially zero probability that the economy is currently in recession.

Haven't we seen this model before somewhere? "These subprime CDOs are bulletproof, triple A." Yea, that's the ticket.

GoinFawr's picture

Exactly Steve, without Sauron who needs Gandalf? Er, where is Gandalf these days anyway?

dead hobo's picture

No double dip ... a possibility.

Squalid, emaciated, anorexic, lohanesque growth on the good days ... the top end optimistic view.

I'm an optimist.

Assetman's picture

You know the old saying: If you can dazzle 'em with brilliance, baffle them with bullshifts.

homersimpson's picture

Well whatever they said, it's working. The DJI shot up like a rocket the past few minutes.

economessed's picture

There is no accountability for anything Goldman has to say or do -- anything goes.  If Andrew Tilton is dead wrong about everything he has said, he will still receive a bonus equal to the unemployment checks of 1,730 laid-off manufacturing employees.


LeBalance's picture

check out the lyrics in the authors summary section: prescient.

Sudden Debt's picture

Conversation between Goldman and CNBC:

You keep'em dumb, while we rob the blind!

dantes1807's picture

Ha. I was reading that Goldman raised its estimates on Catepillar too. Even though all the economic data shows further weakness. Even worse, CAT is highly leveraged so if there is a credit problem they will be in a world of hurt.

VK's picture

ROFL!! What a different world it will be a year from now when the Squid is bankrupt and dismantled and 33 Liberty is foreclosed upon :)

Muir's picture



Well let's be fair here.



"Our subjective assessment of recession probability leans to the high side of the model results."

" Substituting these variables in our original model (with the yield curve) gives a recession probability of 6.1%.  So far, not so bad, but if we combine the yield curve adjustment and the employment-related adjustments, the model generates a 23.9% probability that the US economy will be in recession in six months’ time.  In other words, it suggests recession is not a base case, but is clearly more than just a tail risk."


True, it is buried a little further down and is a little couched in subdued terms and, ah, fuck it....

Cognitive Dissonance's picture


A wonderful example of an outcome based analyst working the CPU magic. Propaganda is another word to describe this type of "report".

"Let's see, since I want this outcome, what can we tweak where and by how much to get what we want."

I do my taxes this way. How much do I want to pay the IRS this year? $4,394.23!

OK, let's get to work. :>)

AR's picture

Hey CD & Cheeky  /  Hope you guys are well.  I thought I'd surface and tell a little story that occurred recently.  A few weeks ago, my wife and I traveled to the northeast, and were invited, to attend a weekend get together at a top Ivy League University (it was an alumni fund raiser disguised as an high-end investment seminar). Anyway, to attract big money players (donors), they invited 40-50 of the country's top money managers. Attending were some industry heavy hitters whose names are readily identifiable.  There were 8 panelists who gave speeches. Audience participants (other money managers) were encouraged to provide input and commentary.

Not to disparage our industry, but truly, 90% of those who attended were nothing more than "small-minded, industry indoctrinated, SHEEP" bottom fishing for fees and more investment dollars to manage.  Every single one of these guys stood up and "parroted" the preceding moron who kept talking about traditional metrics like low PE ratios, debt ratios, forward looking earnings, and the like.  After 2 hours of this moronic, parroted bullshit, my wife (a simple minded, blunt and perceptive woman) leaned over to me and whispered " God, is there no one in this room who is an independent, creative thinker…?"  Of which I quickly answered:  NO.

MORAL:  Zero Hedge does a great job at exposing the bullshit in our business. But, after 30+ years in the business, we are constantly stunned at the idiotic, self-serving retroact that is spewed from the so-called “investing elite” in our industry.  90% of ALL these money managers are well educated morons and robots, specially TRAINED to SELL.  And sell they do.  In our observation, they have scant disregard toward their investors or the money they manage. And, they have little independent, creative thought and analysis toward markets. Instead, they do what Andrew Tilton from Goldman does – they spew and spit out bullshit to the public, and worse, to their investors.  If there is a lesson from this, it is to approach the business using your OWN MIND, with a healthy skepticism toward everyone and everything you read. Guys like Andrew Tilton are a dime a dozen. And yes, in our opinion – they are IDIOTS.  Good luck everyone.


Cognitive Dissonance's picture


Thanks for an update from the trenches. I talk about this often, most recently in my "Insane Asylum" series. The "experts" are certified sane by the queen bee and the profit lay within the group think meme.

For those old enough to remember the follow phrase "No one was ever fired for hiring IBM." When you stick with the consensus, even when the shit hits the fan, you can always say "We never say it coming" and be absolutely correct and part of the majority. Who says the insane reside within the walls if the insane asylum?

Cheeky Bastard's picture

The Ts say 12.xx%. Now, who would i rather believe; the largest market in the World or 1 guy from GS and his "models" [fuck yo monte carlo nigga].

Muir's picture

The Ts of course.

But his buried 23.9% also sounds good.

velobabe's picture

sorry :ø(         velo kick to deu

hey, thanks again for your public P U T   D O W N.

bounced back, found my cycling forum heaven.

over 75 hits to my picture album in 48hrs.

H I T†

Originally Posted by velobabee: FIFA World Cup 2010

reply: Your lucky this thread hasn't as many readers as the others do. You might want to hold back on some of that info in future with the guys running around here. What you wrote will get some people hot under the collar.

eckart's picture

Another weak close today and its 875 in jig time baby!

cainhoy's picture

you fools! that was really a coded message to thurston howell III to get the hell out of dodge before all hell breaks loose.

DaveyJones's picture

Lovey gave me the heads up on the coconut phone

Joe Sixpack's picture

Actually the program spit out the result "42", but the geniuses at Goldman were able to interpret that.

Cognitive Dissonance's picture

About 2 or 3 times a year I pop the DVD into the player and have some fun watching the best example of our insanity recorded on film ever.'s_Guide_to_the_Galaxy

Assetman's picture

I'm glad I'm not the only one who gets a kick out of watching "Hitchhikers" every now and then.

As for as the economy is concerned, I think Marvin sums it up best: "I can tell you what it means... but you won't like it."


surferexx's picture

ignoring key variables when producing mathematical models, brilliant.  I would love to see this guy teach algebra, "so children, here is the equation of a line, but in this instance we are going to ignore slope".  Good luck on your test!

Coldcall's picture

Models? Whenever i hear folks using "models" to pretend they can predict complex non-linear chaotic systems like the economy or markets, i know i am listening to bullshit. End of.

Sudden Debt's picture

It's like predicting my wife's moodswings. If apple would ever make a app. to make a model to predict those, I wouldn't even bother to check the price of it.

Kina's picture

I never realised things were so bad. A GS 1.6% probability translates to 98.4% when the truth filter is applied.


GS are about as despicable and trustworthy as a pedophile in a kindergarten.

Cpl Hicks's picture

You want idiosyncratic factors to throw into your models?

Just wait until November.


dirtiersanchez's picture

Zerohedge obviously has an enormous neg bias. However we all should remember...we could get our faces ripped off when such a bias so linear.  Remember kids.....when it all looks so so bad...and the pundits are uniformly sliding into one camp...take the other side....albiet for a trade or otherwise......for there is nothing prettier then watching a market climb a wall of worry. We have seen just that in the last two days.  The neg news will mean less and less over the coming weeks...1040 will be a pretty floor again. Heed.

firstdivision's picture

No, I believe the 1040 will not hold even today.  This is a test to break it for now, and it definitely will not hold if we continue to get negative news on the economic front. 

onecrazytexican's picture

Great theory and I would agree if everyone actually were sliding into one camp, but the indicators I use to determine sentiment suggest that isn't the case, regardless of what the cliche of the moment is.

firstdivision's picture

Now the downward pressure on the SPX will kick into gear.


This is what I see from GS - passed along by a friend ...

- - - - 


1. Friday’s jobs numbers were disturbing.  At best, they show an economy that is growing only quickly enough to keep the unemployment rate flat near 10%.  At worst, they suggest that the labor market is once again turning down.  Both the manufacturing workweek (the only part of the employment report included in the index of leading indicators) and the employment/population ratio (the broadest job market measure in the household survey) dropped significantly in June.  Given the noise in these series and—in the case of the workweek—the potential for substantial revisions, both fortunately fall short of a clear-cut signal that another labor market downturn has begun.  But we will need to see at least a partial reversal of these declines next month.


2. This comes at a time when the end of the inventory cycle has triggered the inevitable slowdown in the manufacturing sector.  With inventory investment now again close to a normal rate, GDP growth is likely to converge to final demand growth, which has averaged only 1½% since mid-2009 and is unlikely to accelerate given the various headwinds facing the economy.  The resulting slowdown in GDP growth is likely to be concentrated in the goods-producing sector, which previously received the largest boost from the inventory cycle.  Hence, further declines in the ISM index following last Thursday’s drop to 56.2 are likely; our GDP forecast implies a decline to around 50 by early 2011.


3. The weak labor market implies not only a great deal of hardship for workers, but also a growing risk of deflation.  Although the last couple of core CPI/PCE releases were a bit higher than those earlier in 2010, the trend still seems to be downward and other measures such as wage growth and inflation expectations have been declining.  In particular, the 5-year 5-year forward breakeven inflation rate in the TIPS market has fallen 75bp since April and now stands at 2% for on-the-run securities, the lowest level since mid-2009.


4. Our recently released Global Economics Paper No. 200 entitled “No Rush for the Exit” argues that policymakers should react to the combination of a sluggish recovery and declining inflation with additional policy easing, either via a return to unconventional monetary policy or via further fiscal stimulus.  The obvious counterargument is that monetary and fiscal easing carries long-term costs in the form of, respectively, a risk of a renewed asset bubble and a higher public debt burden.  But our study shows that these costs look far from prohibitive at present.  On the monetary side, US financial markets are nowhere close to bubble territory.  On the fiscal side, it is difficult to argue that the US government has reached the limits of its debt capacity when long-term bond yields are low and falling, and when federal interest payments stand at just 1½% of GDP.  When compared with the risk of a renewed economic downturn and/or a descent into deflation, the cost of additional stimulus seems to be well worth paying.


5. So what is to be done?  On the monetary side, the possibilities include additional purchases of Treasuries and mortgage-backed securities, as well as TALF-like structures—i.e., special purpose vehicles that lend to nonbanks using equity provided by the Treasury and debt provided by the Fed.  Whether these will happen anytime soon is another matter.  Additional purchases of Treasuries and/or MBS mortgages do not yet seem to command a sufficient majority on the FOMC.  This might change if growth and/or inflation ease further.  But even then it is unclear just how effective they would be.  After all, Treasury purchases did not seem to have much impact in 2009, and MBS spreads are already quite compressed, limiting the potential for further narrowing.  A TALF-like structure could be more powerful, but it would need the Treasury’s cooperation and the Fed’s authorization under article 13.3 of the Federal Reserve Act, i.e. the Fed would need to invoke “unusual and exigent circumstances.”  This is a very high hurdle.


6. On the fiscal side, we hope that Congress passes the extension of emergency unemployment insurance, continued aid to state and local governments, and at least a temporary extension of the bulk of the 2001/2003 tax cuts beyond the end of 2010.  If some of the tax cuts are left to expire, then this should be offset by temporary fiscal easing elsewhere.  The point is that a tightening of the overall fiscal stance at a time when the economy is already struggling to maintain the current, unacceptably low level of resource utilization is a bad idea.  In fact, we favor additional deficit-financed stimulus, coupled with a commitment to cut the longer-term deficit more aggressively than currently envisaged in the administration’s 10-year plan.  The consolidation could include cuts in discretionary expenditures, slower growth in entitlement spending, and gradual hikes in both direct and indirect taxes.  The precise mix is a matter of political preferences, and reasonable people can disagree about the pros and cons of different measures.  But the need for long-term budget restraint should not stand in the way of a near-term boost when the economy clearly needs it.


7. A failure to enact additional stimulus—at a minimum, extended unemployment benefits, state fiscal assistance, and extension of the bulk of the 2001/2003 tax cuts—would imply a downside risk to our GDP and employment forecasts, specifically for 2011.  Right now, we are showing a gradual reacceleration to 3% on a Q4/Q4 basis in 2011, but we worry that this might end up being too optimistic.  We will evaluate developments both on the policy front and in the US economic data closely over the next few weeks to see whether any adjustments are warranted.

dirtiersanchez's picture

No sir. This rally has legs...and follow through...check your markets...gonna rip all day..bias is up....will be self fulfilling over the next few days. The stress test news is monstrous and certainly a catalyst for risk to be put on.

onecrazytexican's picture

Thank you for your comment. As typically happens when I make bold predictions, you've caused the market to reverse.  I, for one, appreciate your contribution.

walküre's picture

Sir, gravity is pulling the markets back to Earth. Whether you, Goldman, any xyz financial "wizard" or whoever makes the boldest predictions.. the laws of gravity will apply.

dcb's picture

if we grow at zero percent we aren't in a recession. that doesn't mean stocks aren't over priced here.