Goldman's Stealthy GDP Boost

Tyler Durden's picture

An event that did not catch much media attention yesterday was Goldman economist Jan Hatzius' under the radar boost to Q3 annualized GDP expectations from 1% to 3%. As regular readers know, it is prudent to always take Goldman advice and ideas with a dash of Cayenne pepper (Hatzius after all was the same gentleman who in January was suggesting a Taylor-implied -6% Fed Fund rates). However, reading the Goldman report demonstrates that this is not the bullish portent that some have made it seem to be.

The primary causes for Hatzius' GDP boost come from a near-term boost due to inventories, fiscal policy, and homebuilding, while unemployment, inflation and monetary policy are not expected to have a GDP impact.

Here is the detailed observations provided by Jan:

1. A bigger inventory boost. Friday's GDP numbers showed even more inventory liquidation in the second quarter than we had anticipated. This implies an even bigger boost to goods production as firms bring production into closer alignment with demand. Judging from the sharp pickup in the ISM factory index, this process seems to have started.

2. A bigger fiscal boost. The impetus from fiscal policy to real GDP growth in late 2009 and early 2010 now looks somewhat larger than we had anticipated, as discussed in yesterday’s daily comment. This is due partly to a slower-than-expected take-up of the spending provisions in the fiscal stimulus package in early 2009 and partly to the apparent success of the “cash for clunkers” program.

3. An earlier and bigger homebuilding bounce. Homebuilding seems to be turning up earlier and more sharply than we had anticipated, at least for now. Based on the recent data on housing starts, building permits, and home sales, we now expect real residential investment to rise about 10% over the next year.

Yet Jan's reasoning on this matter seems sound, as he argues that any near-term steroidal boost will come at the expense of protracted and increased sluggishness on the tail end: something the Obama administration has proven is all that matters in an economy where bailing out today at the expense of tomorrow is the utmost priority.

We see the growth momentum slowing anew after the near-term spurt; in fact, we now expect the second half of 2010 to show a bit less growth than the first half. The reasons for the renewed slowdown are as follows:

1. Waning temporary boosts. Factors 1 and 2 above—inventories and fiscal stimulus — have only a temporary effect on GDP growth. The table below shows our estimates of the impact of both factors on quarter-on-quarter annualized growth. (Note that the combined impact differs slightly from the sum of the two columns because we have adjusted for the “double-counting” implied by the fact that our fiscal stimulus estimates incorporate assumptions about fiscally induced inventory effects.)

The upshot from the table is that the combined growth contribution from the inventory cycle and the fiscal stimulus package will decline from about 4 percentage points in 2009H2 to 2 points in 2010H1 and further to -1 point in 2010H2. Even if Congress passes some additional stimulus in 2010, as we expect, this means that the underlying pace of final demand growth will need to accelerate substantially just to keep real GDP growth from slowing sharply in 2010. Some acceleration is likely as these factors, along with the rebound in housing, help stabilize payrolls. But we doubt this will be enough to forestall a slowing in growth.

2. Financial headwinds for consumers. Despite increasing over the past year, the personal saving rate – at 4.6% in June 2009 – was still well below the 6%-10% range that prevailed prior to the equity, housing, and credit bubbles of the 1990s and 2000s. Meanwhile, the weakness in household income will make it harder to raise saving without significant constraints on consumption.

One key issue is the sharp slowdown in hourly wage growth, which has fallen from around 4% (annualized) in 2006-2008 to just 0.7% over the past three months. Although the recent minimum wage hike could provide a boost to wage growth over the next couple of months, we expect the slowdown to resume, pushing wages down by around ½% in 2010 (see “Nominal Wage Deflation by 2010?” US Daily Financial Market Comment, July 6, 2009). This 4½-percentage-point slowdown in nominal wage growth corresponds to a real wage slowdown of about 2 percentage points, using our forecasts for headline PCE inflation. This would lower real household income growth by 1 percentage point. From a real income perspective, it would be the equivalent of a deterioration in nonfarm payroll changes by about 300,000 per month.

3. Excess supply of houses and capital goods. Although homebuilding has bottomed and the downturn in capital spending is slowing, we do not expect a “traditional” rebound in these sectors, largely because the overhang of unused capacity in both the housing and business sectors remains enormous.

So in summary - Obama's ever increasing subsidy programs ala Cash For Hairdryers and the upcoming Cash For Ratting Out Nonconformists will have a phantom impact of making it seem things are better while all these temporal redistribution mechanisms do is take from the future in order to satisfy the US consumer in the here and now. And the fact that nothing at all is being fixed in the economy, quite the contrary, with every day, America gets tens of billions of dollars deeper into the debt black hole, seems perfectly agreeable to all those in power.

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buzzsaw99's picture

fed gub tax receipts down 18%, GDP up? Someone is lying. If I lived in a golden tower I would probably be wearing rose colored glasses myself. Never trust a man trying to sell you something good.

jdoo's picture

Debt fueled spending closes the gap no?

jdoo's picture

You disagree with Hatzius' point #2?

buzzsaw99's picture

The Big G gets an "E" for effort, but they fail the course.

PD Quig's picture

Of course growth now is a priority. The 2010 election season begins soon, and it would not do to have unemployment at 10+ percent, negative GDP, and cratering consumer confidence. It looks like 3Q GDP will be positive now (amazing what a few trillion in USG spending can do). Every bit of spending legislation passed by this Congress has been with an eye to their primary interest groups in support of 2010 electoral prospects.

MinnesotaNice's picture

Inventory build-up means nothing... it is an illusion... there is little end demand.  And if the the Health Care Reform measures are passed with business bearing the burden... then watch wages plummet... and demand for those inventories be crushed.  My company supplies health insurance to many of our employees... however we plan on decreasing wages across the board for whatever increases are mandated with Health Care reform... you can't squeeze blood from a turnip.  This 'shell game' sponsored by the Obama administration (who I voted for) will be ending soon. 

OrganicGeorge's picture

I assume you do not own a business.  Health care cost are skyrocketing so the public option will start to bring down cost.  Nothing happens immediately; which everyone but Wall St understands. Quarter by quarter improvements are not that important, unless you are a trader.

We are talking about starting a 180 turn on health care.  It will take years for the full effect to be felt.  It's the damn quarter to quarter focus that is also responsible for the bad business decisions that helped this economy into the ditch.



MinnesotaNice's picture

Actually George I do own the business... with 400 employees. I appreciate your comments.  Two years ago we would have had the ability to absorb an increase in health care costs out of our profit and/or pass the increase along to what we charge our customers... but with the recession it isn't possible.  An 8% penalty such as what is being proposed in Health Care Reform has to go somewhere... which is against the total employee compensation package... and where it will be felt most painfully is wages... there just isn't any cushion left for many businesses to wait for the 'public option' to bring down the skyrocketing health care costs as is the hope for Health Care Reform.  But as a matter a principle, if Health Care Reform passes I do support the public option because many of the insurance companies are playing in a moral or ethical sandbox. 

crzyhun's picture

You need to do more research on your assumtions and analyze yoiur biases.

Excellent article in WSJ on Tuesday by Art Laffer on the health care wedge. Ease to understand and persuasive. Spot on really. 

WE have abdicated too much to big government due to an entitlement and rising expectations mentality.

Any realisitic innovations are welcome. Sweet talk, patter and jive is not.

aldousd's picture

Certainly bad business decisions helped run the economy into a ditch, but it was not the lack of government subsidized insurance that caused that.  40% of all health insurance tab is CURRENTLY paid for by the (not necessarily federal) government. This includes medicare, medicaid, schip, and some other point solutions.  How is throwing out a new option, that will force current insurers out of business (no doubt they are far from perfect, as they shield the consumer from the actual costs apart from co-pays, and thus encourage higher prices,) going to help? This simply shifts the decision on what is covered and not from a businessman (who can raise prices to offset costs or preferences of customers,) to a bureaucrat who cannot because if he does, he will not be re-elected.  Remember, people will not settle for anything less than a 100% free lunch once we start down this path.

MinnesotaNice's picture

My business is a health care business and we deal with health insurance companies on a daily basis... let me just share with you some of the games we find and have been substantiated by the salesman who work for those insurance companies.  One of the games is called "lets lose the paperwork" in which paperwork submitted to the insurance company is lost each and every time it is sent to them... so no claims can ever be paid until 'they get the proper documentation'.  Another is called "lets make the documentation requirements so burdensome" that no one would ever want to fulfill them to get the claim paid.  Many of our clients just give up in getting their claims paid.  In MHO, Medicare is the one and only payor that can be consistently relied upon.. and I have to tell you that even though I am a capitalist... I would select the public health insurance option if it was available... just like I select the public option to make sure I have clean water flowing into my house.

ptoemmes's picture

Reading this and recalling Jon Stewart's recent interview with Waxman re: the 1,200 page health care reform bill - on the heels of the 1,200 or so page "carbon credit" bill...

...and being mindful that polictcs is the art of the possible - as /permitted funded by special interest groups, lobbyists, etc...

...I still have to wonder why "they" just do not extend Medicare to everyone.  Let the capitalist free marke issue the supplemental insurances if someone wants/needs them.

I know that would be single payer goverment health care, but i'd bet you could write the bill on one page of paper - maybe two.



MinnesotaNice's picture

Another Jon Stewart fan... love it... they are few and far between on this site...

Anonymous's picture

This market is great...just wait till 10:30 and buy. Nothing to see here...move along.

OrganicGeorge's picture

Everbody doin everything wrong.  If only we would listen to Wall St. traders who have the long term heath of the masses in their hearts.

Anonymous's picture

The health insur scum are going along with insuring pre-existing conditions FOR ONE REASON.They are going to stiff the OLDER ratepayers, as my wife researches this everyday and our Kaiser insur allows them to charge older (us, over 50) UP TO 7x more, and they are currently charging 2 1/2x the younger rates, so Boomers are about to get the royal shaft by Obama-For-Change.(yes, we voted for The Facilitator)

channel_zero's picture

our Kaiser insur allows them to charge older (us, over 50) UP TO 7x more, and they are currently charging 2 1/2x the younger rates

1.  You don't understand how insurance works. You are more likely to be sick.  When you get sick, it tends to be more expensive to heal you.  Therefore, you pay more insurance premiums.

2. While I agree that whatever health care 'reform' passes will be bad-to-awful for most Americans, you are woefully ignorant.  You are getting exactly what you put into the system.  Nothing.  In fact, you and I reward the people who do put plenty into the political system.

Anonymous's picture

I'm glad we've got a goldman story. But where are the accusations of nefarious behaviour?

MinnesotaNice's picture

Accusations of nefarious behavior are no longer required... it is just now an accepted part of the formal definition of "Goldman Sachs".

Anonymous's picture

Mish says consumer retrenchment for 12-15 yrs. But market up 60% more????

Anonymous's picture

"And the fact that nothing at all is being fixed in the economy, quite the contrary... "

You left out the Fannie Freddie good bank bad bank scam- ClusterStock has a good piece on that today:

Anonymous's picture

Ritholtz takes issue with Zero on CNBC's ratings -- hmmmm

zeropointfield's picture
zeropointfield (not verified) Aug 6, 2009 10:53 AM

Interesting. Barry is now in the "the figures are abysmal, but they don't matter" camp.

Anonymous's picture

Barry enjoys his infrequent appearances on that so called finanical network

Anonymous's picture

Who really can take Goldman serious? Rosy headline to cash out and get short? Remember the $200 oil call at 130 so they could get out and short? Thieves is all they are. This is classic bait and switch. Now as we approach the 38% retracement, the mkt can finally be at least a 2 sided affair. My bet, however is a steep fall selloff. Israel and Iran will be front and center by October. Who can't see that coming. That might be the excuse the government needs to let it all go. Blame it all on geopolitical risk that catches everyone off guard. Even an idiot like me can see that one coming.

deadhead's picture

Abby Joseph Cohen just declared "a new bull market". 


MinnesotaNice's picture

Abby Joseph Cohen is a joke... her last great prediction was in 1990... with stunning misses in 2000 and 2008... she should go and work for the government... she has the required Goldman Sachs credentials.

Anonymous's picture

Yea, unless there is a public inflation scare while the unemployment rate continues to sour, and the Fed responds by sucking liquidity out of the system with great rapidity.

Gordon_Gekko's picture

If nominal GDP "growth" is all that matters, then Zimbabwe is probably the most advanced nation on earth.

Anonymous's picture

here are goldman and morgan's economists when interviewed

a better perspective

zarrmax's picture

So.....GS revises GDP upwards, Abby goes on TV telling the sheeple a new bull market has been founded, sell your souls and go long. GS continues the upward pressure by shorting the dollar and buying any piece of crap with a high short interest squeezing the shorts causing an even bigger move upwards. Larry "there's no such thing as a bear market" Kudlow continues preaching the bull. Sheeple listen and decide margin isn't as bad as everyone says... They double down.

Equities continue their rise to ridiculous levels and when GS could not possibly be any more short, Geithner will pull the trigger by saying housing + unemployment is not getting better and banks will need to raise additional capital or they will be seized by the FDIC. This of course causes the sheeple to stop and think that maybe, just maybe things didn't get any better. They'll try to sell only to find no bid.

Of course the market will then start the C wave down (twice the move of A) and Goldman's plot to take over the world will be complete...

It's almost to easy...:)


Anonymous's picture

Can anyone recommend a current book that does a good job of exposing the insider and Fed-pumped market that has been so clearly exposed by this crisis. I've read and enjoyed "Greenspan's Bubbles." Anything else out there to recommend?

MinnesotaNice's picture

Perhaps Bailout Nation by Barry Ritholz

Anonymous's picture

OK, thanks.

Anonymous's picture

I shall read this for sure. Here's a snippet from the author's comments about the book on Amazon:

"Astonishing things happened as the book progresses. The more I researched and wrote, the more it was apparent we were witnessing the greatest heist ever made. By the last section of the book, history's biggest transfer of wealth -- from the taxpayer to the Banksters -- was taking place. Trillions were being shifted from the responsible to the reckless, from the prudent to the incompetent. It was infuriating -- and you will see as the book progresses my initial academic tone gets replaced with greater snark and anger.

I not only had my ending, I had a new cause -- exposing those who caused this mess, be they Democrat or Republican, Corporate CEO or derivatives trader. I hope the end result is something that will inform and illuminate, while entertaining you along the way . . . "

Anonymous's picture

no humor by the shadow:
Is Goldman Sachs the World's Biggest Ponzi Scheme?

Anonymous's picture

nice post - it's Jan Hatzius with an "a"
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