In Startling Note, Goldman Warns Economy Shifting "Into Disequilibrium" Under Trump, Increasing Recession Odds

Tyler Durden's picture

It was about a year ago when, in a note brimming with optimism, Goldman Sachs (which had just released its Top 6 trades for 2016, 5 of which would close out at a loss just two months later) predicted that the Fed would hike rates 3 times in 2016, a year in which the economy was expected to storm higher. It has yet to hike them once (although the market is 90%+ convinced this will happen next month) even as the economy has done virtually nothing, and some can argue contracted further for most of the world class leading to Donald Trump's "surprise" victory. 

Fast forward one year when here we are again, a few weeks ahead of the Fed's December hike (which probably will happen now that everyone is freaking out about the Trumpflation tsunami even though nobody has actually seen any detail thereof), and out comes Goldman - like clockwork - with another report in which it forecasts the same as it did a year ago: namely three Fed hikes in 2017 after the December one; in other words, Goldman believes that by the end of next year, the Fed Funds rate will be around 1.50%, or where the 10Y was just two months ago.

Good luck, and we say that because a closer read of the Goldman report reveals that while Jan Hatzius lays out all the optimistic highlights that have been factored in by stocks and bonds as of this moment, he proceeds to highlight in extensive detail why not only Trump's policies may not be largely implemented, but why the market could be significantly disappointed.

Here are some of the highlights from the Goldman notes penned by chief economist Jan Hatzius:

Donald Trump will take office next January in what is likely to be the 91st month of the current expansion—already the fourth longest in US history. At the start of his term, he will be supported by Republican majorities in both houses of Congress— just as President Obama presided over unified Democratic control in 2009-10—which should make it easier to shape government policy through appointments and legislation. Taken together, the prospects for significant changes in policy and an economy moving into the later stages of the business cycle will mean higher uncertainty—making for an especially interesting US economic outlook this year

However, despite the aged-nature of the economic cycle (assuming such a thing even exists in a centrally-planned world), Goldman is optimistic. Either that, or it still has a lot of risk to sell to retail in what is now a clear bloff off, euphoric top for stocks, coupled with a great rotation out of bonds and into equities. As a result, Hatzius only sees a 21% probability of a recession in 2017.

Despite the mature expansion, Mr. Trump can probably count on continued growth in the early part of his new administration. Our research suggests that economic expansions have no fixed timeline—they do not “die of old age”—so there is no reason to expect a downturn simply because of the long stretch of growth. In developed market economies, the unconditional odds that an economy will fall into recession in any given year are about 10-15%, implying that the economy has a 70- 80% chance of avoiding recession for the next two years. Our formal recession probability models are similarly benign, showing odds of a downturn over the next year of 21%, and over the next two years of 26% (Exhibit 1).

However, as Goldman hinted previously, the biggest risk to the near-future is als the same wildcard that has given markets so much optimism: what exactly will the final shape of Trump reforms be. Here Goldman is once again, less enthusiastic.

First the good news:

Any fiscal stimulus from the next administration would be an added tailwind for 2017 growth. At this early stage there is still a wide range of possible outcomes for fiscal policy (see here for our detailed analysis). Our current working assumption is that the next Congress will pass a fiscal package totaling $150bn per year, or 0.8% of GDP. Of this total, we expect $100bn in tax cuts ($70bn for individuals and $30bn for firms), and a $50bn net spending increase ($40bn for infrastructure and a net $10bn for other programs). We estimate that these policies would have a weighted average multiplier of 0.8. Thus, all else equal, a fiscal expansion of this size would increase the level of real GDP by about 0.6%—or a 0.3pp boost to growth per year if phased in over a two-year period.

Now, the bad:

While we see substantial support in Congress for proposals to cut taxes and reform the tax code, our current impression is that market expectations of quick fiscal expansion may be running ahead of political and legislative realities. For example, the federal fiscal position is much less favorable than at the time of earlier tax cuts, in 1981 and 2001. As a share of GDP, federal debt held by the public is expected to be 76.6% in fiscal year 2017, compared to 25.1% in 1981 and 31.4% in 2001. Moreover, the Congressional Budget Office (CBO) projects a budget deficit of 3.4% of GDP over the next five years, compared to projected budget surpluses of 2.0% in 1981 and 3.3% in 2001 (Exhibit 4). Given this fiscal backdrop, many members of Congress may be hesitant to support large deficit-financed tax cuts.

Some more bad news for stocks which are pricing in not only a second US golden age, but surging inflation:

In addition, a number of Mr. Trump’s campaign proposals would weigh on growth if enacted, including (1) tariff increases and other trade restrictions, (2) immigration reform which reduces labor force growth, and (3) hawkish appointments to the Federal Reserve. As with fiscal policy, it is difficult to have confidence about what changes will eventually occur, and some of the most adverse proposals from the campaign will likely be watered down. However, if followed to some degree, these aspects of the administration’s agenda could offset the positive effects of fiscal stimulus. On net, we think Mr. Trump’s policies could boost growth in 2017 and 2018, but are likely to weigh on growth thereafter if trade and immigration restrictions are enacted or if Fed policy turns more restrictive. We could envision both more favorable and more adverse outcomes, depending on the specific policy changes.

And then the last bit of bad news:

A final reason for only qualified optimism about the US growth outlook is the economy’s limited supply potential. Since 2010, real GDP growth has averaged just 2.1%, but the unemployment rate has fallen by 5.1pp. This implies that potential growth has declined to exceptionally low levels by historical standards. Our statistical estimates suggest that measured potential growth has averaged just 1.1% since 2010; the CBO is only slightly more optimistic, with an estimate of 1.4%. We expect productivity and potential GDP growth to eventually pick up—with potential growth rising to 1.75% in our forecasts—but would not count on fiscal policy or regulatory changes to revitalize productivity right away.


Because of slow potential growth, the economy is already operating close to full capacity despite low top-line GDP growth during the expansion: we now see an output gap of only -0.5% to -1.0%. After a recession, above-trend growth can be easier to come by as firms have ready access to underutilized labor and capital. With the economy closer to full employment, higher demand can result in supply bottlenecks, resulting in more limited gains in growth and higher inflation.

Ah yes, inflation: coming at a time when the potential growth of the economy "has declined to exceptionally low levels", there is a better word for what will happen shoudl Trump's policies unleash higher prices at a time when the economy is barely treading water: stagflation. However, unlike its report from a week ago, Goldman has refrained from using that particular word in its benchmark economic outlook (for obvious reasons).

In any case, the topic of inflation brings us back to what the Fed - badly behind the curve already - will do to limit any surprises. Here is GOldman's take:

With the economy approaching full employment and inflation moving towards target, the FOMC will be motivated to continue raising the funds rate next year. We see a high probability (90%) of a rate increase at the upcoming December meeting, and forecast three hikes during 2017, putting the funds rate range at 1.25-1.50% by the end of next year. In contrast, markets currently discount a 1% funds  rate by end- 2017, and 1.4% by the end of 2018. Even under our projections for the funds rate, we forecast that the economy will moderately overshoot the Fed’s employment and inflation goals. In our view, the market-implied path for the funds rate would result in too little tightening of financial conditions and a significant overshooting of the FOMC’s objectives .

In other words, if Goldman is right, the market will scramble to catch up with a Fed that will have to hike far more often that is currently expected, resulting in a big squeeze in financial conditions, i.e., coordinated asset selloff.

On the other hand, even Goldman admits that the biggest risk is that it is, once again, wrong in its optimism:

The risks to our forecasts again looked titled moderately to the downside, and for the same reasons that derailed our forecast this year. First, we have found some evidence that the FCI has been more sensitive to funds rate shocks in the “global divergence” environment of the past few years. A higher sensitivity of the FCI to funds rate changes would imply fewer rate hikes for the same economic outcome. Second, the FOMC may tolerate a more meaningful overshooting of its 2% inflation objective than we expect. The potential benefits of such an approach include 1) a reversal of some of the supply-side damage from the recession and 2) perhaps a firmer anchoring of inflation expectations, which some policymakers believe are at risk of slipping below 2%. Partly offsetting these concerns, a larger-than-expected fiscal boost would be a source of upside risks to our funds rate call.

Ah yes, nothing like the Fed "overshooting" inflationary expectations on tens of millions of angry replorables whose cost of living is about to soar, simply hoping that a spike in consumer prices translates into higher wages.

What can possibly go wrong? Well, lots of things, as the market and the economy will find out in the coming year, as One River's Eric Peters dramatically predicted this morning.

But what about Goldman? How does this note, which is really nothing more than a bearish wolf in an optimistic sheep's clothing, end? Here is the answer:

The US economy has come a long way since President Obama took office, in the thirteenth month of what would become the eighteen-month-long Great Recession. At that time policymakers were focused solely on kick-starting a recovery, whereas today they also must consider the risk of overdoing it. Fed Chair Yellen touched on this point in Congressional testimony this week, telling lawmakers: “In contrast to where the economy was after the financial crisis, when a large demand boost was needed to lower unemployment, we’re no longer in that state.” She interpreted the market reaction to the election results as indicating that policymakers “will ultimately choose a fiscal package that involves a net expansionary stance of policy, and that in a context of an economy that’s operating reasonably close to maximum employment, with inflation heading back toward two percent, that such a package could have inflationary consequences that the Fed would be — have to take into account in devising policy”.

And the punchline:

Given above-trend growth, and with the prospect of fiscal stimulus, we see the US economy moving into modest disequilibrium over the next 1-2 years, with an unemployment rate falling below its long-run sustainable rate and inflation rising above the Fed’s target. From the perspective of the financial crisis and slow recovery that followed, this outcome looks like a big victory. But looking ahead, overshooting means that the economy could begin to develop imbalances, increasing the odds of another downturn further into the forecast horizon.

Translation? The Trumpflation bounce may last briefly, call it a year or two, at which point fiscal policy will be tapped out as a result of never before seen levels of debt, leading to the next major economic crisis, one which will promptly bring the Fed out of hibernation, and lead to what will very possibly be the final episode of quantitative easing, at which point the scenario envisioned by Oswald Gruber kicks in, central banks lose credibility, and the very long overdue global crash finally takes place.

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Son of Captain Nemo's picture

What fucking "sword of Damocles" are they holding over his head at this point when he has at least 2 Goldman Sachs "ex-professionals" already in place?...

RafterManFMJ's picture

They're getting ready to pull it!!

Son of Captain Nemo's picture


The only way they will receive redemption in this life and the next is if that is their only mission!

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) Son of Captain Nemo Nov 20, 2016 8:13 PM

So... we're not already in a recession?!?!?

MonetaryApostate's picture

Don't you love it when they explain what they planned a loooooooong time ago?
I mean, it's not like they haven't forced this downturn economy so they can buy up everything at fire sale prices, am I right?   (With freely printed $$$ to boot!)

espirit's picture

Recession, depression, or stawk market fail.

The looter banksters will still outnumber the producers.

Let them not escape with the loot!

Peterk_kk's picture

If Goldman Sachs says sell - BUY!

Takeaction2's picture
Takeaction2 (not verified) Son of Captain Nemo Nov 20, 2016 7:42 PM

The writing is so clear on the wall what is already know.   "You know we have had such terrible loss.....the smartest thing to do was pull it...they made the decision to pull it...and we watched the building collapse."  Same with this....PULL IT...they are going to do it.

LetThemEatRand's picture

I say they give it a year or so before they pull it.  If they act much sooner, it would be too easy for Trump to blame Obama.   They will probably run up the market for a while, then bounce it around, then crash the fuck out of it.  But if all depends on what he does.  If he really takes on the establishment, we could have carnage like we've never seen.

Goldilocks's picture

"...come out of nowhere and just ream right into the side of the twin tower, exploding through the other side...and then I witnessed both towers collapse, one first then the second. Mostly due to structural failure because the fire was just too intense." - Mark Walsh / Mark Adrian Humphrey

Handful of Dust's picture

Don't blame Trump! This disaster is 100% owned by Soweto.

FreeShitter's picture

call it a year or two? I have been hearing that since 2008....pull the fucker already so we can get real growth again and oh, lets eradicate modern day "music" once and for all.

LetThemEatRand's picture

But they don't want real growth for anyone but themselves.  I recognize this is tin foil hat stuff, but the very last thing they want is a crash too early in Trump's presidency.  Trump could end up putting the NWO on a silver platter if they successfully paint him as the destroyer of the economy.  This is a gloden opportunity for them to sell globalism as the one and only way to prosperity.  

e_goldstein's picture

Yeah, it's going to suck for the tools in the finance, insurance, and real estate economy...

but everyone who can make and do actual shit will be just fine.


Lynx Dogood's picture

So aafter Gldman Killed the trump. Is this the new Trump afterlife???


Goldmaaan might be the biggest jokoe in the history of the world!!!!!

dogsandhoney2's picture

um, bannon just said 'negative' rates.

hiking after trump's in office is very unlikely.

rally on infrastructure, dude.

Dragon HAwk's picture

Some where there is a code, when these banks say one year they mean 2 months, and when they say near term , they mean Long 1 year, if i could just crack that propaganda code i could be a rich man.. except i refuse to play.

DirkDiggler11's picture

The "Code" is right in front of you, out in the open. The "code" is simply Dennis Gartman. Just trade the opposite of his advice and you can retire early and focus on your preps for when the collapse does happen.


That's quite the fluffjob from Goldman Sachs-of-shit post-election bullshit I must say. I'll bet GS hires great hookers too.

RiverRoad's picture

Goldman talking down the "market" can only mean one thing:  Their itchy trigger finger's getting ready to buy.

Cardinal Fang's picture

Translation: we have lied so much about the U.S. Economy, that a two year old could turn it around and get it going again.

The conflict arises when the 95 million workers that were sidelined decide to come back and seek work again.

Then unemployment immediately goes back up to 12% and the printing press has to be turned back on.

Then the shit hits the fan.

Wahooo's picture

Oh, it's just now happening, eh? Fucking middle east banksters.

exartizo's picture

I see mid term prosperity as credibility and equilibrium returns to markets under Trump and all asset valuations return to sanity and to honesty without bankster enforced manipulation.

I see Yellen waiting for food in a bread line with all the other Creepy Neo-con come liberals come elite defunct political class come MSM traitors.

I see deflation coming and gold increasing in value.

I see the Euro going belly up and all the Euro nations regaining sovereignty and control over their own affairs independent of a fascist Euro Zone Oppression.


And fuck you Goldman.


A ZH Reader

chosen's picture

Who cares what those fucking Khazaris say.  They should move to Israel or back to Khazar Russia, as soon as possible.

kappal_toba_dhurr_ne_thook's picture

First off, USA is going into DEEPER recession than the new normal recession. Next, USA recession is depression in most other nations. 

What a joke this headline is. Also what a joke it is going to be when Trump takes over from Obama. Not that Obama was such a dear, but Trump has no policies other than rhetoric.  Bloody embarassment to Americanos I must say, at least to the thinking ones left. If there ever was a time to leave USA it is NOW!  

tarabel's picture



The probability of a recession in 2017 is virtually 100% now that the BEA is taking their thumb off the scale.

The only way it won't happen is if there is a hidden Trump rally like the hidden Trump vote that will be large enough to swamp the efforts of the bureaucrats to make ANYTHING look like a recession. 

One economic indicator that is sure to go up, however, is the number of homeless derelicts that will suddenly be dredged up by the media and paraded round as symbols of Trump's failure to help ordinary alcoholic drug addicts, er um forgotten Americans.

Grandad Grumps's picture

The Federal Reserve bank and its owner banks run the economy, not the president. It is not hard for the lead "owner bank" of the Fed to predict what it is going to do when it is fully in control of it.

Restated: Today Goldman Sachs warned that it and the other crony international banks are going to trash the U.S. economy and blame Trump.

bobdog54's picture

Step 1: use artificial means to fix a recession and pretend we actually fixed it while adding trillions to the American debt and to banker's pockets.

Step 2: make it Trump's fault.

Step 3: use pitchforks with ruthless abandon.

Step 4: once again enjoy nonPC life, liberty and the pursuit of happiness.

JBPeebles's picture

CBO numbers are completely farsical. In 2014 they forecast it woud take 10 years to get to $20 trillion in national debt. We did it in two.

I still don't quite know what the goal posts are. Since no one--especially Goldman--can admit they don't know where the goalposts are, they revert to scenarios based on what they believe to be future GDP. These projections are notorious as they're vulnerable to whichever fiscal policies the elite choose to pursue. These are political forces as fickle as the wind. Priorities can shift in an instant.

Right to admit Trump's likely plan will be fiscally expansive. Effect on GDP of much needed infrastructure upkeep might be good. It's a borrowing--perhaps the only one--that can be justified to the young who will have to pay for it, if the repairs will hold that long.

A real fix is WPA-sized. It should generates a significant multiplier effect--far more so than  giving the banks free money or even building aircraft carriers at .1, or the unfinished F-35 at .001? Keynesian option can help the real economy but the heavy financialization which was  championed as the source of the "recovery" by posing as real growth--to fit the goalposts du jour--now will shrink due to the losses in bonds and fear of further rate rises.

What goes up must come down. The Goldman perspective attempts to predict the goalposts some time into the future and political risk can exert huge changes on the most conservative projections. Look at the pension collapse. An average cop in Nevada spends over 40% of their pay towards underfunded pensions.

Ten years ago the projections looked fine. I don't know if higher rates will make the situation better. The losses on existing bond portfolios has been immense. Don't try to play this  market! Better to get out and wait.

aldol11's picture

goldmans economy may shift out of equilibrium allright...

not that of the average american

marcel tjoeng's picture


So Goldman is now manned by halfwits?

This Goldman report written by the intern?




onmail1's picture

<--- ooooooyeeeaaaah the Zooish Exceptional TBTF

is warning ppl.

Count ur blessings 

& dont do anything clever

remember Kristalnacht, Blitzkrieg


The HoloWhat thingy

But these zooish dont listen

(dont tell them, the blood of Jesus is upon them

who cursed them 7 times 'Woe to you'

Matt 23:13-29)


In a moment ur business can be snatched

taken over 

and nationalized

for good

AlbertthePudding's picture

Is that a continuation of the recession they in my view induced or a whole nuther one that they are about to induce?

Still, they have everything to lose.

Don in Odessa's picture

Goldman, king bankster thieves of the world are warning of a "possible" recession under Trump? LOL! First, we are already in one. It's just in such a slow motion the number folks are able to jiggle the numbers around to hide the fact. Yes, numbers are jiggly. But more than that this "warning" looks to me like a threat to Trump. If he doesn't fall in line with the globalist. banskter, oligarch plans, they are going to make it very difficult for him.

Oh wait, I'm looking behind the curtain. Just ignore me folks. Move along, nothing to see here.

d edwards's picture

Excuse me GoldmanSucks, but who has been in charge for the last eight years?

Vin's picture

And there it is.  Donald hasn't even begun yet but the bankers are already preparing us for their retribution.  Oy vey.