Goldman's Extended GDP Analysis
Ah yes, inventory, inventory, inventory... The little deux ex machina that almost could... Until Hatzius sprays some serious water in your face. And take the other side on any Hatzius bet at your own peril. Seriously. You don't even want to know what the Stardust line is on Hatzius being wrong on this one. Although if you get the counter trifecta, you could be the proud owner of $90 trillion of in the money interest rate swaps (good luck, sucka).
We estimate that real GDP grew 2.7% (annualized) in the third quarter. Our number is below the Bloomberg consensus of 3.2%, probably because our estimate of the pace of inventory liquidation is more aggressive than that of other forecasters.
- On the brighter side, more inventory liquidation this quarter means a better starting point for subsequent periods. At least outside the auto sector, most of the inventory boost still lies ahead. This should boost production in the fourth quarter, where we currently estimate 3% for real GDP growth.
- Our longer-term views remain unchanged. Stronger growth now is likely to give way to weaker growth in the course of 2010 as the boost from fiscal stimulus and the inventory cycle wanes while underlying final demand growth picks up only moderately.
With all the relevant data now in hand, we shaved our third-quarter GDP estimate to a gain of 2.7% (annualized) this morning, from 3.0% before. The GDP report is due at 8.30 EST on Thursday. Our estimates for the major GDP components are provided in the table below.
While a 2.7% quarter would provide more evidence that the recession probably ended this summer, our estimate is below the 3.2% Bloomberg consensus. It puts us into the bottom 20% of the 79 forecasters in the survey, whose predictions for this release range from 2.0% to 4.8%.
Why are we below the consensus? It is hard to be certain as Bloomberg only provides consensus figures for GDP and personal consumption, so we cannot compare our estimates against the consensus line item by line item. But we suspect that we have a lower estimate for the inventory contribution to GDP growth than many others. Although the monthly inventory data show a slower pace of liquidation in the third quarter than in the second quarter, it is important to note that these figures are reported on a book-value basis. When commodity prices rise, book-value inventory data will overestimate “real” inventories, which are what ultimately matters for GDP growth. The Commerce Department adjusts for this via a so-called “inventory valuation adjustment,” which is likely to be negative in this case, but at least some forecasters may fail to adjust properly for this factor when tallying up their numbers.
On the brighter side, more inventory liquidation this quarter means a better starting point for real GDP growth in subsequent periods. Indeed, at present the risks to our respective Q4 and Q1 estimates of 3% and 2% are slightly tilted to the upside. This is because fiscal policy is still providing significant help to growth and most of the inventory boost still lies ahead, at least outside the auto sector. We will watch the upcoming data releases closely to determine whether adjustments to our near-term estimates are warranted.
Beyond the near-term “bean count,” our broader call for a sluggish recovery with falling inflation and continued low interest rates remains unchanged. It is based on two considerations. First, the overall economy is probably weaker at present than suggested by many standard indicators and the strength in the equity market because smaller companies—which are underrepresented in standard indicators and are not publicly traded—are underperforming larger ones. Hence, there is a significant chance that growth in the second half of 2009 will be revised down from whatever preliminary estimates the government statisticians publish over the next few months, once more complete source data become available.
Second, the economy will lose the benefit of the fiscal stimulus and the inventory cycle over the next year. We estimate that these factors are worth a total of 4 percentage points in terms of the impact on annualized real GDP growth in the second half of 2009. If our estimate is correct, growth will slow over the next year unless underlying final demand growth—“organic” growth, if you will—picks up by 4 percentage points or more. While some improvement in organic growth is likely, we expect it to fall well short of 4 percentage points given the continued headwinds from the weakness in the labor market, consumer deleveraging, excess housing supply, and state and local budget cutbacks.