Goldman: "We Expect A Downward Revision To The Fed's 2013 Growth Forecast"

Tyler Durden's picture

One of the unpleasant side-effects for the Fed's forecasting (insert laughter here) abilities, is that following today's GDP revisions, H1 annualized GDP is now 1.4%. It means that there is no way that the economy can grow fast enough in the second half (especially with such early disappointments to the second half as the just released Chicago PMI miss) to meet the Fed's forecast growth of 2.3%-2.6%. Which, in turn, means more egg on the face of Bernanke and the FOMC's 2013 forecasts. Which is precisely what Goldman just said.

From Jan Hatzius:

1. Real GDP grew a stronger-than-expected 1.7% in Q2 (vs consensus 1.0%). By component, personal consumption expenditures grew 1.8% (vs consensus +1.6%), nonresidential fixed investment increased 4.6%, and residential investment increased 13.4%. In contrast to the large declines seen in recent quarters, federal spending declined only 1.5% as defense spending stabilized. Imports (+9.5%) grew more quickly than exports (+5.4%), leading to a widening of the trade deficit which subtracted 0.8 percentage point from growth. An increase in the rate of inventory accumulation added 0.4 percentage point to growth in the quarter.

 

2. Annual revisions to the historical GDP data lowered the annualized rate of growth by an average of three tenths over the past year (leaving the most recent 4-quarter growth rate at 1.4%), but resulted in a small net upward revision over the past six years. Due to definitional changes, the level of nominal GDP was raised by a cumulative 3.4% in Q1.

 

3. In light of real GDP growing by only 1.4% at an annualized rate in the first half of 2013, it is unlikely that growth in the second half will be strong enough for the Fed's 2.3 to 2.6% real GDP growth projection to be realized. As a result, we would expect a downward revision to the Fed's 2013 growth forecast in the September Summary of Economic Projections. (Updated forecasts will not be released at today's meeting.)

So here is the $64K question: how does Bernanke justify tapering at precisely the same time when it has to announce a lower 2013 growth forecast?

Simple - he doesn't, but since US deficit funding needs are projected to be 30% lower in Q4 compared to last year as we first reported, he has no choice. Ironically, what the Fed desperately wants, is for Congress to boost the deficit so the Fed can, when it has to, untaper and resume monetizing $85 billion or more in monthly flow, and credit instruments. Which also means that Syria should be afraid, very afraid: after all what better way to generate government deficits than the old tried and true staple. War.