Goldman Cuts Q3 Growth Forecast In Half, Sees Q3, Q4 GDP At 1.0%, 1.5%, Presents Jackson Hole Event Walk Thru

Tyler Durden's picture

Sorry Goldman, in the race to downgrade the US to 0.0001% above contraction, you are still well behind The Fonz in coolness. Frankly, following your December 2010 report you are not even cool enough to pass off for Richie Cunningham. But your third downgrade of US GDP in a month, this time slashing Q3 and Q4 GDP is surely a valiant attempt at regaining some of the Fonz pre-Jersey Shore panache. Keep at it. Another year of being just thiiiiis much behind the curve, and atoning for your shark jumping adventures, and you may be cool again. From a just released report by recent addition to the Goldman economics team (supposedly Jan was too busy elsewhere) Zach Pandl: "In light of the downshift in the data this week, we are cutting our second-half growth forecasts further. We now expect GDP growth of 1.0% in Q3 and 1.5% in Q4, both down from 2.0% previously. These changes reduce our forecasts for full-year 2011 GDP growth to 1.5% from 1.7%. Exhibit 1 shows the details." Now: who will join Zero Hedge in calling for negative GDP in Q3 and most likely Q4 (absent QE3; with QE3 the BEA will mysteriously find another 4-5 GDP percent hidden under the carpet). Far more importantly, Goldman once again explains what to expect at next week's Jackson Hole. We say importantly, because while Goldman is about as clueless at most at predicting the future, when it comes to monetary policy, Goldman determines it. So it is always useful to pay attention: after all Hatzius "predicted" the QE2 announcement roughly about a year ago to the dot.

On cutting GDP:

From already quite low growth rates, it appears that the US economy is losing further momentum. According to our Current Activity Indicator (CAI), underlying growth was about 1.5% (annual rate) as of July, and several major indicators for last month— nonfarm payrolls, retail sales, industrial production— were surprisingly strong. However, timelier survey- based data have turned down sharply, and weakness in the hard statistics seems likely to follow with a lag.


It is true that data on August activity is still relatively limited at this point. But of the major indicators released so far, one was weak (the Empire State index) and two were exceptionally weak (Consumer Sentiment and the Philadelphia Fed index). The most positive signal has come from jobless claims, which are roughly unchanged from last month and down from the spring. The survey data could potentially have been biased downward by volatility in financial markets and the contentious debate over the debt limit. But we do not want to take that argument too far: these are important cyclical indicators, and they are pointing to even weaker growth ahead. Updating the model from last week's US Economics Analyst with the latest data on equity prices and housing starts and an estimated value for the August ISM gives a probability of about one-third that the economy is currently in recession.


In light of the downshift in the data this week, we are cutting our second-half growth forecasts further. We now expect GDP growth of 1.0% in Q3 and 1.5% in Q4, both down from 2.0% previously. These changes reduce our forecasts for full-year 2011 GDP growth to 1.5% from 1.7%. Exhibit 1 shows the details.

And on what to expect next week:

Will Bernanke Move Mountains?


Against this challenging backdrop, Chairman Bernanke will deliver his address to the Fed’s annual Jackson Hole Conference next week.2 Given rising recession risks, worsening financial market conditions, and the FOMC’s surprisingly aggressive moves at its last meeting, investors are probably right to be focusing intensely on the event. We expect his speech to contain three main elements: 


1. Discussion of the dimmer growth outlook. The statement from the last FOMC meeting made clear that the committee made a significant change to its growth forecasts. The statement said that growth had been “considerably slower” than expected this year, that temporary factors “account for only some of the recent weakness”, and that “downside risks to the economic outlook have increased”.


The speech will be an opportunity for Bernanke to describe the Fed’s revised view in more detail. While he is likely to be downbeat about recent developments, we expect that he will still argue that the conditions for an acceleration later this year and in 2012 remain in place. The last post-meeting statement said    the    committee    “anticipates    that    the unemployment rate will decline only gradually”, which hints at a slightly above-trend growth outlook.


Recent comments from other Fed officials have been moderately constructive on growth. For instance, Cleveland Fed President Pianalto said earlier today that she expects growth of about 2% this year and 3% in 2012. New York Fed President Dudley also said this week that recent data were “at worst mixed”, and that growth will be “significantly firmer” in the second half. With annualized GDP growth in the first half of 0.8%, this is not an especially optimistic view, but it suggests Bernanke could sound positive relative to the current market consensus.


2. Defense of earlier policy actions. Weakness in growth and renewed questions about Fed easing have naturally raised questions about the effectiveness of its tools. We expect that Bernanke will address this issue directly in his speech, as he did in Congressional testimony last month. At that time, Bernanke argued that quantitative easing (QE) was effective in reducing the risk of deflation, emphasizing the rise in market- based measures of inflation expectations. He also said QE was helpful in “shoring up economic activity”.


It may be difficult for Bernanke to lean on these arguments today. The weakness in activity—and especially the downward revisions to GDP in late July—casts doubt on the claim that asset purchases have stimulated growth, at least in the eyes of many observers. Inflation expectations remain around levels consistent with the Fed’s target, but if higher inflation expectations are the only impact from QE, it would make little sense to ease now.


We think Bernanke will stick to a few main points. First, he will probably reiterate that the Fed’s expectations for the impact of QE were low, and therefore that slow growth does not necessarily imply that QE failed. At last year’s Jackson Hole speech he said that “central bankers alone cannot solve the world’s economic problems”; a repeat of this type of language seems likely. Second, he could argue that securities purchases ward off the tail risk of deflation, and that if the economy slipped into recession, deflation risk would return. Third, we think he could again list the many studies about QE and their quantitative estimates of the impact on growth. Emphasizing the positive effects of past asset purchases would implicitly help justify further action. 


3. Review of the easing options. The Fed has three main easing tools: 1) communication; 2) asset purchases; and 3) cutting the interest rate on excess reserves. At the August meeting, it exercised option #1 by making a conditional commitment to keep the funds rate low until mid-2013. Option #3 is often mentioned but in our view is unlikely for several reasons. That leaves only option #2, asset purchases.

We believe Bernanke’s Jackson Hole speech will include a detailed discussion of the potential for more easing through large-scale asset purchases. A variety of indicators suggest many investors already expect more QE. For instance, a recent CNBC survey shows that more than $300bn of purchases may already be priced in. The sharp decline in forward real rates is also partly related to QE expectations, in our view (Exhibit 2).5 Based on our conversations with clients, we believe investors would be very surprised if the speech did not include a discussion of asset purchases.


We see two main reasons why Fed officials may prefer to change the composition of the balance sheet as a first step. First, as we showed in Monday’s US Daily, if used aggressively this could have a sizable impact. For example, if the Fed were to sell its Treasury securities that mature over the next two years and buy securities in the 10- to 30-year part of the curve—apportioning them based on amounts available in the market—it could take a similar amount of duration risk onto its balance sheet as in QE2 (around $350bn in 10-year equivalent terms, or 80-90% of QE2). The policy could be scaled up further by weighting purchases toward even longer maturities, or by changing the mix of the mortgage portfolio.


Second, policies that keep the size of the balance sheet (and excess reserves) unchanged may be less controversial among politicians and the broader public. A detailed discussion of possible changes in balance sheet composition seems a likely component of the Jackson Hole speech.


Bernanke may of course also discuss conventional QE. Arguments in favor of this approach include a less complicated exit strategy—if securities mature faster, the Fed may not need to sell actively—and potentially a larger impact on confidence and expectations. We do not think Bernanke will signal anything more unconventional, such as a higher inflation target, price level targeting, or a long-term interest rate target.6 However, these ideas may turn up in the FOMC minutes published on August 30. 


While listing the easing options looks probable, Bernanke is very unlikely to pre-commit to taking action next week. This is a monetary policy decision, and any announcement would come at an FOMC meeting. In addition, core inflation continues to accelerate, and Fed officials seem to have a rosier outlook than our forecast or the consensus. While we expect additional QE and the odds are rising at the margin, it is not yet a done deal.

Remember: central bank policy only works when it is a surprise.

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markmotive's picture

It's amazing how fast stories and outlooks change.

I'm still waiting for the mainstream to admit that gold is not in a bubble. To hit the bubble peak of 1981, based on this metric gold would neet to hit $7250!!

When my mom tells me she wants to buy gold...that's when I know it's over.

Oro's picture

My mom asked about it today. I believe we have along way to go!

Caviar Emptor's picture

My mom is a gold bug. We ain't seen nothing yet

mkkby's picture

Mark Motive -- After your mom put her clothes back on, she asked the football team about internet stocks.  So I guess the nasdaq was never a bubble.  Sorry, that was just too tempting :)

The fed doesn't want to seem predictable or giving in to pressure.  Since everyone is anticipating a QE announcement next week, it won't happen.  They'll try to make it a surprise some other time.

Sequitur's picture

What do you mean over? Frankly, nothing is over until the Eurozone is resolved (and I think that will be implosion of the banks and the sovereign debt, with a massive rush to safety). Germany will not bail out its WWII enemies.

Arius's picture

What Germany couldnt achieve through military Wars in either World War I and World War II, is surely accomplishing it peacefully through World War III.

Germany might never be allowed AGAIN to develop as a threatening big military power, but they have managed to be a mighty economic ruthless superpower!

HungrySeagull's picture

We are probably already in the early stages of a full blown WW3 shooting era.

FlyPaper's picture

I seriously doubt the Germans are looking at European nations as their old enemies.  That generation is nearly gone (as it is in the US).   The German culture is fairly thrift oriented; and they still have the sting of the Weimar disaster.  I doubt that very few people are willing to bail out their neighbors for their stupidity in managing their finances; hence I think the Germans will bail out their own banks (or perhaps their depositors) in order to stabilize their economy; but I will be surprised as hell if they will sign up to bail out countries in order to save the Euro and I'll be even more surprised if they agree to bail out their banks at 100%.  

Implying that the Germans of today hate their old enemies seems rather unjust.

gwar5's picture

Not about hating, it's about access and acquisition to resources to maintain lifestyles. 

"Countries don't have feelings, they have interests."

"It's not personal, it's strictly business." -- Michael Corleone

mayhem_korner's picture

Think about it...the price of gold has to rise in real terms for it to catch up with the 1981 highs.  So if the dollar is continually de-based, the equivalency price will keep going up. 

What would the equivalent price need to be if the DXY was at 30?

It may never catch up!


Spitzer's picture

"he could argue that securities purchases ward off the tail risk"

Tail risk again... Isn't that why he said people buy gold, because of "tail risk" ? So gold should fall by purchasing securities....Hmmmm.

DormRoom's picture

The US has always gone into a recession with GDP growth of < 2%, since WWII.  Third revision Q1 GDP was .08%.  First revision Q2 GDP was 1.7%.  We are likely in a recession right now, but bank economists won't say so, until their trading desks finish unwinding.


oblonsky's picture

the funny thing about recessions is that if you tell people long enough that we're not in recession, it's actually possible that you prevent the recession from occurring. it's a self-fulfilling prophecy. if people think we won't enter a recession they may be willing to spend more, consider buying that house, car, whatever. but if you tell people "we're entering a recession" many people will put off those same purchases, and, lo and behold, the prediction will come true. 

WonderDawg's picture

Wrong on many levels. Business cycles demand recessions, they are a natural occurence in a healthy business cycle.

Also, we (humans) are hard-wired to move along a mood spectrum with optimism on one end and pessimism on the other. As we move across the spectrum, bull markets and bear markets occur. Socionomics postulates that these natural "mood swings" are the root motive of business cycles.

Whatever the case, you can't wish a recession away.

Caviar Emptor's picture

Yup. The recession is all in our heads

WonderDawg's picture

I left out a pretty important aspect of the socionomics theory: humans in a society collectively move from optimism to pessimism and back and forth again, in an endogenous instinct related to the primal herding impulse. This is the root motive for business cycles. That's the theory in a nutshell, as it applies to the economy.

Caviar Emptor's picture

So..maybe the government should distribute free Prozac

WonderDawg's picture

Fuck that, just legalize weed.

HungrySeagull's picture

Free Zanex to reduce anxiety so they can make better trades.

onlooker's picture

""Now: who will join Zero Hedge in calling for negative GDP in Q3 and most likely Q4""  Hey, I'll join you in what ever the hell you wanta do or go. Just toot the horn, I'm packed.

Drag Racer's picture

I hope GDP does go negative. GDP calculation is a joke. Less Gov. spending means a drop in GDP. People saving instead of wasted spending means a drop in GDP. Less financial shenanigans means a drop in GDP. What's not to like...


can we get back to 'real' production now? I'm getting a bit tired of this made in China crap.

OldPhart's picture

That's a butt-ugly chart.

Notice how that gaps from the 90's forward?

gwar5's picture

Nice chart. That's the go-to place for real data.


WonderDawg's picture

I'll take it a step further and say that when the final revisions are in, Q2 was negative.

gwar5's picture

Isn't GDP already negative priced in those debasing nominal USD? 

Isn't that the problem, and we're just shuffling paper money around on the plate with the fork?

It's Gross and Domestic, but there's no Product.


IQ 145's picture

I join. Considering inflation it is negative now.

lunaticfringe's picture

If the Fed leaves interest rates near zero for two years, why the fuck do we need them at all? Can't we just lay them off? At least for a couple years?

digalert's picture

Hey Golden Slax

Ya gonna join S&P with a USA downgrade?

How about Moodis analyst admitting you're all liars?

YesWeKahn's picture

Another down day Monday?

Long-John-Silver's picture

I can't remember which talking head on CNBC said it but DOW 8,000 was not an unreasonable drop unless Europe crashes. 

He continued by saying if Europe did crash and they all started printing their own money again things would get really ugly like Gold becoming real money again.

Sequitur's picture

Eurozone will crash. German press advised citizens to buy gold weeks ago. The Eurozone experiment is over, the only way out is default.

sitenine's picture

No growth you say?  Et Tu, Brute?  GS, you were so faithful for so long, doing God's work and all.  Too bad, now you will surely be cut out of the will.


OT: I've seen a few stories on this new IBM chip:

We could soon invent a 'being' far smarter than we are.

Wouldn't it be a bitch if the first words it spoke were, "We're so fucked."?

papaswamp's picture

Skynet needs the troops....the T-1

OldPhart's picture

Worse is when it says "Humans are now fucked."

Ass to Mouth's picture

Goldman is an ATM queen.

papaswamp's picture

So who will be the first to declare a neagtive GDP? Bets anyone?

Yen Cross's picture

I respect you PaPa..  You are a trader of class!  

Yen Cross

Seasmoke's picture

oh yes the fix is in, but i dont think they get away with it this time

Mark Noonan's picture

So, about three months in to the actual recession they should cut it to 0.5% growth?