Hatzius On The Three Reasons The Recovery Is Overstated

Tyler Durden's picture

Economic Surprise Indices have been rolling over for a month or two now. The trend of US macro data has also disappointed in a period when it would be expected (empirically) to accelerate. However, taken anecdotally or cherry-picked managers can find plenty of ammunition to support the to-infinity-and-beyond Birinyi forecast (though often it relies on the most manipulated and adjusted government provided time-series). Overnight's concerns on China show just how quickly confidence can be upset but Goldman's Jan Hatzius sees three main factors for why their GDP-tracking estimate is weakening already (more like 2% than 3-3.5% growth) and that we are seeing slightly softer data already. The end of the inventory cycle, the pulling forward of demand thanks to the warm weather aberration, and the already clear impact on consumption from higher gasoline prices will likely shift from an overstated economic trajectory to more muddle-through or worse for Q2 onwards.



Goldman Sachs: Sticking With Sluggish

The US economic data over the past few months have clearly outperformed expectations. Our current activity indicator (CAI) is running at 3.5% in February given the data in hand so far, and is tracking 2.9% for the first quarter as a whole. However, we expect the numbers over next 2-3 months to slow to a pace that looks more consistent with a 2% overall activity growth pace rather than 3% or even 3.5%.

1. Warm weather has pulled forward activity.


Some of the recent strength in the CAI is likely to reflect the exceptionally mild 2011-2012 winter. To be sure, there are some areas where mild weather has a negative impact on economic activity, such as utilities output and perhaps some retailers that sell seasonal goods. But this is likely to be offset by areas where the impact is positive, as construction and other outdoor activities decline by less in not seasonally adjusted terms than the seasonal factors "expect" and this gets translated into a large seasonally adjusted increase. Overall, we found that the weather has contributed an estimated 0.3 percentage points to the 2.9% annualized growth rate of the CAI in the first quarter so far (see Zach Pandl, "Growth Impact of a Mild Winter," US Daily, March 1, 2012). The impact on a more comprehensive measure of activity that includes both the CAI and GDP would be a bit smaller, perhaps 0.2 points, as GDP is probably less weather-sensitive.


2. The inventory cycle has helped.


The pickup in inventory accumulation from -$2 billion (annualized) in the third quarter to +$54 billion in the fourth quarter contributed 1.9 percentage points to the Q4 growth rate. Moreover, inventory accumulation seems to have picked up a bit further in the early part of the first quarter, judging from the Commerce Department's book-value inventory numbers for January as well as the ISM manufacturing survey for January/February. This suggests that inventories may still be making a positive growth contribution for the time being. But while we are not close to a situation where inventories start to look "heavy," a further positive impact in coming quarters is not likely.


3. Gas prices are starting to cut into real income.


Gasoline prices rose sharply in January and February. Using weekly data from the US Department of Energy, they are now up 9.1% from their end-2011 level on a seasonally adjusted basis, with most of the increase likely to show up in February and March on a month-average basis. According to our models of the link between gasoline prices and growth, such a hit might take 0.3-0.4 percentage points off real GDP growth over the subsequent year. Moreover, using monthly data on the link between gasoline prices and consumption, we find that the impact becomes visible about 1 month after the initial hit, so this would imply that the impact would show up in March and April.

There may be some early signs of deceleration in the data.

The data surprises have indeed turned a bit less positive in recent weeks, although it is too early to say definitively whether this is noise or a more lasting shift. In March so far, our US-MAP scoring system for the economic data relative to consensus expectations has averaged a slightly negative reading, despite the better-than-expected February employment report. Of course, some of this just reflects the fact that consensus expectations have caught up with the better data. However, there are also some faint signs in the more forward-looking indicators that the tone of the data may be shifting down a notch. In particular, the new orders indexes of the February ISM, March NY Empire State, and March Philly Fed survey all fell moderately.

Our bottom line is that there are several reasons to believe that the recent data may have overstated the strength of the US economic data. For the first quarter as a whole, our current best guess is that a broad measure of activity growth that puts most of the weight on the CAI but also some weight on the GDP bean count is currently running at a 2.6% pace; we believe that this might overstate true growth by perhaps 0.2 percentage points because of weather, so that the second quarter is likely to understate growth by 0.2 percentage points (for a "swing" of 0.4 percentage points); the end of the inventory cycle might take a couple of tenths off growth; the impact of the gas price increase might take another few tenths off growth; and we may be seeing some signs of softer growth in the most recent data already. All told, we believe that the numbers are likely to slow to a pace that looks much more consistent with a 2% rather than a 3% or even 3.5% growth pace through the end of the second quarter.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LongSoupLine's picture

Goldman working that additional QE nipple hard.

Quinvarius's picture

There is a lot wrong with that comment.  "Hard", "additional nipple", and Goldman "working". 

LongSoupLine's picture

The "working" is legitimate as long as "for clients" is not in the sequence.

as for "nipple" and "hard"...well, just raw Freudian on my part.

Cult_of_Reason's picture

Oil spikes or the Fed's repeated insanity always trigger recessions? http://static6.businessinsider.com/image/4f67d132ecad04b61d00001c/chart.png

The Fed sees deteriorating fundamentals -> injects additional liquidity (thinking they are doing a “good thing”) -> free/cheaper money from the Fed exacerbate oil speculation -> oil prices spike up parabolic until killing the economy

The Fed always repeats the same mistake and gets the same result – oil spike and recession.

Everybodys All American's picture

4. 5 trillion new US Debt load in bailing out banks errr holding companies like Goldman and Morgan Stanley. No that wouldn't have any effect on GDP.

fightthepower's picture

Fuck you Bernanke!

pazmaker's picture

speaking of Bernanke,  I see he is teaching some undergrad classes this week at George Washington University and they can be watched life on the feds website

pazmaker's picture

You don't say?


MFL8240's picture

Next you can expect the US credit rating to go back to AAA by the hack they put in S&P that will be the clincher to reelct this facist and kill Gold.  Wait and watch, its coming despite no growth and a recovery made from false and misleading goverment reports. 

Quinvarius's picture

They can't kill gold.  They can only take down their own fraudulent futures markets and fraudulent actors within it.

The reason gold and silver are money and corn and oil are not, is they can be stored in anyone's closet indefinately.  You don't need to sell your contracts before the product goes bad.  It never rots.  It costs nothing to hold onto.  There is no possible way to stop a physical money hoarding spree. 

Cdad's picture

Moreover, using monthly data on the link between gasoline prices and consumption, we find that the impact becomes visible about 1 month after the initial hit, so this would imply that the impact would show up in March and April.

The negative effect of fuel prices is ALREADY being registered at Ceridian.  After a complete disaster on this index for January, the Feb bounce back was meager and insufficient to turn the tide that is clearly coming for consumption.  Additionally, the index is also confirming the conclusion that there is NO RECOVERY in housing.


Jim in MN's picture

Reason #666:  Insane and rampant CORRUPTION that destroys both capitalism and democracy.  Today's case in point:


Insider-trading bill grinds to halt


By Molly K. Hooper - 03/19/12 08:38 PM ET

A bipartisan bill on insider trading that had been steamrolling through Congress has ground to a halt.

victor82's picture

Harry Reid swore up and down he was going to stop the STOCK Act. Why?

Forget the fact that Reid is a swine and a corruptocrat; they want to sideline Scott Brown, the bill's main backer, and give ol' Whatsername a chance in Mass.

Aside from that, the Banksters use stocks to manipulate Congressmen and Senators. Can't have Honest Government, can we?

azzhatter's picture

better than "expected" , is that the same as "unexpected?"

MFL8240's picture

"The US economic data over the past few months have clearly outperformed expectations"


So as the game is played, set them so low you will make things look good.  This is a fucking clown show!

AU5K's picture

OBAMA, 2013:


"My new Making the Economy Work plan will require every business to pay into a business ticket system, based on your profit level.  Then, we will give out these tickets to every business based on their need to hire workers and their strategic value to America.  An economic boom with jobs for everyone that wants to work is right around the corner."

BLOTTO's picture

I think all is on hold until after US Presidential Elections... ALL the bulshit numbers in all the important financial sectors are setting up for an Obama second term victory.

Which is after the London Olympic Games,

Which is after the Queen's Jubilee,

Which is after and or during Euro2012...

Strategic positioning and jocking around to align everything up.

Than! the drama heats up... give it another 40 weeks...

btw #44 - gets snuffed

SheepDog-One's picture

I dont believe a word of any of it, 'waiting for whatever event' just nonsense.

BLOTTO's picture


I think you are under estimating the importance of these events.

You think the Royal Family - is going to have SHIT hitting the fan while the Queen is on tour?

Or shit hitting the fan during the London Olympic Games?

These are also HUGE $CASH$ generating events too...

Just thinking outside the box.

AcidRastaHead's picture

Is this economy based on anything other than noise?

SheepDog-One's picture

Yea sure we'll all just 'muddle on thru' the collapse of the western world.

CEOoftheSOFA's picture

So let me get this straight. We are worried about a 1.5 percent difference in a number that is manipulated and is probably overstated by 10 percent?

toadold's picture

"Gas prices are starting to affect real income".......Where the heck has this guy been for the last couple of years?  Oh I forget, he makes enough money that the servants do the grocery shopping and the rest of the time he eats out on per diem or bills a client account.  

victor82's picture

Goldman gave mountains of money, hard and soft, to Obama 2008. Now they are giving less, and covering their bets by giving to Mittens.

You expected Honest Accountability from Goldman?


Kokulakai's picture

Overstated is an understatement.

gibons's picture

Oil prices are hurting real income. Thus, we need QE to support the economy.

victor82's picture

The least they could do is put Mugabe's face on the dollars they'll be printing for QE3.