Goldman Previews Q2: Sees 150K Jobs Per Month Created, And A Slowing Of The Economy
In its latest note, Goldman is not providing any actionable "advice" which is naturally to be faded and would have been thus quite profitable, but merely updates its outlook for the second quarter, which is not pretty. The firm now expects a slowing down in the overall economy to a 2% GDP rate, and an "additional loss of momentum during the next few months", which is to be expected as every bank wants to keep the perception that NEW QE is just around the corner, as economic stagnation can rapidly become a contraction. Most importantly, the firm expects just 150,000 payrolls to be created every month, which net of the 90,000 monthly labor force increase (yes, forget what the BLS tells you - every month courtesy of demographics the American labor force grows by an average of 90k people) means that only 60k jobs will be added to offset the structural job collapse since December 2007. It also means that the pre-election rhetoric will change significantly as the economic strength from the start of the year disappears, and with it any hope of an economic upswing, providing additional ammo for exciting GOP pre-election theater.
Anyway, here is the full Goldman Q2 roadmap. Which means whatever happens, the final outcome will not be what is presented below.
And the narrative:
After months of stronger-than-expected data, the US economy has started to lose momentum. Following the disappointing March employment report, our Current Activity Indicator (CAI) slowed from an average growth rate of 3.2% in January and February to 2.5% in March.
Looking ahead, our forecast of real GDP growth--which remains at just 2% for Q2--looks for some additional loss of momentum during the next few months. This view is based on a number of factors (see Jan Hatzius, "Sticking with Sluggish," US Daily, March 19, 2012). First, the GDP tracking data (currently at 2.3% for Q1) are softer than the CAI (averaging 2.9% for Q1), and they deserve some weight too. Second, warm weather has pulled forward activity in the labor market and we expect payback over the next couple of months. Beyond the labor market, a mild winter probably helped retail and housing activity outperform slightly. (For details see Andrew Tilton, " Bulk of "Weather Payback" in Payrolls Still to Come," US Daily, April 10, 2012.) Third, the (brief) inventory cycle has helped, boosting 2011Q4 real GDP growth by 1.8 percentage points. Although inventories may again make a small positive contribution to growth in the first quarter, a further positive impact in coming quarters is not likely. Finally, we expect the run-up in gas prices to cut into real income. Retail gasoline prices have risen by more than 10% in 2012 so far, and our models suggest that this increase should act as a drag on growth over the next months.
In the remainder of this comment we provide a road map for some key macro indicators that would be consistent with our 2% growth view for the current quarter. In particular, we envision the following landscape in Q2 (see table below for details):
1. Sluggish consumer spending. We expect real consumer spending to increase only 2% at an annual rate in Q2, which implies average gains of 0.1-0.2% per month. We do not, however, anticipate a pickup in the rate of vehicle sales from the March level of 14.3 million (annualized). In turn, the implication for (nominal) non-auto retail sales is for increases averaging about 0.4% per month. Confidence indexes, which rebounded in Q1, are apt to remain around their latest readings (or a bit below).
2. Gradual recovery in housing. Recent housing data have been broadly consistent with our view that housing activity has bottomed, but that excess supply and tight credit will only allow for a gradual recovery in homebuilding. Although warm weather might have helped housing activity outperform slightly in recent months, this effect is hard to discern in the data and likely to be smaller than the typical monthly moves in these indicators. We thus expect some improvement in home sales during the next few months, albeit to rates that remain extremely low by longer-term historical standards–about 325,000 to 350,000 for the annual rate of new home sales and about 4.75 million for sales of existing units. Starts should exhibit a similar pattern, rising to around 750,000 during Q2.
3. Continued expansion of industrial activity. Manufacturing activity has been mixed in Q1 with strong gains in manufacturing output on the one hand, weak durable goods orders on the other hand, and an ISM consistent with moderate expansion of industrial activity. Given these mixed signals, we expect continued expansion of industrial activity going forward. Specifically, we look for industrial output to show gains of around 0.3% on average per month, core capital goods orders to rise by an average of 0.4% per month, and for the ISM index to remain at around 53 (or a bit less) in Q2.
4. Weak employment growth. We expect payroll gains to average 150,000 per month in the current quarter and the jobless rate to drift sideways at its current 8.2% rate. As a result of changes in labor market flows over the business cycle, it can be challenging to translate rates of payroll growth into levels of initial unemployment claims. Our analysis of the "breakeven" level of jobless claims suggests that our employment growth projections would likely coincide with an increase in initial claims from current levels--perhaps to 375,000 or a bit more. (For details see Zach Pandl, "Breakeven Jobless Claims", US Daily, December 20, 2011.)
5. A slight slowing in core inflation. The last year has seen a notable acceleration in core inflation. We view this as the result of a combination of structural forces (e.g. rising rents due to tight mortgage credit conditions and limited availability of apartments) and temporary factors (e.g. the impact of the March 2011 Japan earthquake on vehicle supply and prices). Given the latter, we expect some relief in coming months. (For a recent review of our inflation forecasts see Andrew Tilton, "A Bottom-Up Look at Core Inflation," US Daily, March 20, 2012.) Specifically, we expect core consumer prices to rise by an average of around 0.15% during the next few months, pushing down the year-over-year core CPI inflation rate to 2% at the end of Q2, and further to 1.6% at the end of 2012.
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