Goldman's Stealthy GDP Boost
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.