It's official: the double dip is here. Goldman's Jan Hatzius just lowered his GDP forecast for 2011 from 2.5% to 1.9% (kiss goodbye all those 93 EPS estimates on the S&P), increased his unemployment forecast from 9.8% to 10.0%, boosted his inflation expectation from 0.4% to 1.0%, and said that QE lite is now on the table, as he expects that "the FOMC to announce that they will reinvest the paydown of mortgage-backed securities in the bond market at next Tuesday’s meeting." Look for all other sell-side "strategists" (here's looking at you Neil Dutta) to lower their economic outlook in kind, and the 2011 S&P consensus to decline accordingly.
From Goldman Sachs:
Over the past two to three months, the US economic recovery has lost a considerable amount of its momentum. As a result, our forecast of a significant slowing in US growth in the second half of 2010—widely regarded as implausible just three months ago—is now increasingly accepted as the baseline. As the data disappointments intensified in early July, we indicated that we would consider revisions to our economic outlook. With the annual revisions to real GDP now behind us, we are making the following changes:
1. Slower growth in 2011. We continue to expect real GDP growth to average 1½% at an annual rate in the second half of 2010. However, we have scaled back the anticipated reacceleration in US output in 2011, largely due to heightened congressional resistance to extending various measures of fiscal stimulus. Thus, whereas we previously forecasted growth to rise from 2½% in the first quarter to 3½% by the second half, we now look for a more gradual pickup—from 1½% in the first quarter to 3% in the fourth quarter. The 2¼% fourth-quarter-to-fourth-quarter average is about 0.9 percentage points below our previous forecast; on an annual average basis our forecast for growth in 2011 drops to 1.9% from 2.4%. As a result of this downgrade, we now expect the jobless rate to rise to 10% by early 2011 and remain there for the rest of the year.
2. Continued disinflation, but at a slower pace than before. We now expect both the price index for personal consumption expenditures excluding food and energy (core PCE index) and the core CPI to slow to a year-to-year rate of ½% by year-end 2011; our previous forecasts were ¼% and zero, respectively. Although the growth revision implies a larger output gap over the next 18 months, two other considerations dominate: (a) upward revisions to core PCE inflation announced in the latest annual GDP revisions, and (b) signs that disinflation in rents may have ended.
3. A return to unconventional monetary easing by late 2010/early 2011. We expect the Federal Open Market Committee (FOMC) to respond to renewed upward pressure on the unemployment rate with another round of unconventional monetary easing. These measures could involve more asset purchases—probably Treasury securities—and/or a more ironclad commitment to low short-term policy rates. If the committee decides on more asset purchases, the amount would be at least $1 trillion (trn).
4. A “baby step” to unconventional easing next week. Although it is a fairly close call, we now expect the FOMC to announce that they will reinvest the paydown of mortgage-backed securities in the bond market at next Tuesday’s meeting. This would be a “baby step” in the direction of renewed unconventional easing, although it would probably be packaged as a decision to prevent a gradual tightening of the overall stance.
The table below shows the key changes in our forecasts. Further detail will be available in today’s US Economics Analyst.