Goldman's Post-Mortem: "Congratulations Mr. President, We Are Cutting Q4 GDP To 1.5%"

Congratulations on the four more years, Mr. President. To celebrate, Goldman starts by cutting the Q4 GDP forecast from 1.9% to 1.5% (and let's not forget that the same Goldman is predicting a 15% drop in the S&P in the next two months to get the Fiscal Cliff deadlock to break).

Full just released note.

President Obama Wins; Slight Changes to Fiscal Policy Assumptions and Forecast

BOTTOM LINE: The election has produced a status quo election outcome. We are changing the fiscal policy assumptions in our forecast, to assume expiration of the upper-income tax cuts.


1. President Obama has won reelection, with a status quo outcome in Congress. Some results are still preliminary, but the President has won with around 50% of the popular vote and 303 electoral votes (29 votes in Florida are still undecided) compared with the 270 votes needed to attain a bare majority in the electoral college. Republicans lost two seats in the Senate with two Democratic-held seats still undecided (but preliminary results indicating they will not shift the balance of power). Republicans won the majority in the House, though Democrats made incremental gains as expected, with 15 seats still undecided.

2. We are making slight changes to the fiscal policy assumptions embedded in our forecast. President Obama has indicated he would veto legislation that extends the 2001/2003 tax cuts for income over $250k, while congressional Republicans have objected to decoupling them from the middle-income tax cuts. In light of the President's reelection, we have opted to assume that the upper-income tax cuts will expire. These are worth $56bn in 2013, and their expiration is likely to increase the drag on growth from fiscal policy by around 0.2 percentage points in 2013, on a Q4/Q4 basis. While there is a clear possibility of a compromise at a higher income threshold like $1 million, this is roughly balanced by the possibility of fiscal restraint from other unexpected sources, or the possibility that Congress fails to address the fiscal cliff until early 2013.

3. Based on these slightly modified fiscal assumptions and other developments, we are changing our forecast slightly. We are taking down our Q4 GDP growth forecast from 1.9% to 1.5%, due to a change in the tracking assumptions for October after Hurricane Sandy. Our forecast for Q1 and Q2 2013 will remain at 1.5% and 2%, respectively. Although the additional fiscal restraint would weigh on growth, the rebound from Hurricane Sandy is likely to lift growth which should mostly offset the fiscal effect.

4. Congress will return next week to begin work toward a compromise to avoid the tax increases and spending cuts scheduled to take effect at the start of 2013. The President is expected to release a fiscal proposal in the next few weeks as well


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