Goldman Report

[Skip to the end]

Thanks, and agreed with the general forecast.

That ‘money started to come into the markets’ feeling is from the deficit spending moving up through 5% of GDP as the automatic stabilizers do their work.

The proactive fiscal adjustments beginning in April, however modest, will add to the inflow.

Markets that have been pricing a 100% chance of oblivion are shifting to pricing in maybe a 50% chance of oblivion which means substantial asset price adjustments are underway.

US Views: On Track for Stabilization?

  1. Although we still think real GDP will fall by about 7% annualized in Q1 and the labor market numbers remain awful, the good news is that the weakness is shifting from more leading to more lagging sectors. On average, consumer spending leads inventories by 1 quarter and capex by 2 quarters. So it’s noteworthy that consumer spending looks to be slightly positive in Q1, while capex could fall 30%+ and inventory investment is likely to subtract about 2 percentage points from GDP growth. That’s a big shift from 2008H2, when consumer spending was down 4% and inventories actually contributed positively to growth.

  3. If a) the consumer spending path remains slightly positive as the fiscal stimulus kicks in and b) the pace of inventory liquidation peaks in Q2 — both reasonable assumptions in my view — then it becomes possible to see how real GDP stops falling in H2, as we have been assuming in our forecast. Yes, capex (incl. nonresidential construction) will probably still be falling steeply, but this should be roughly offset by a big pickup in government spending as the spending provisions of the stimulus package ramp up. So while it is still way too early to call the bottom of the recession and the risks in the near term are still tilted to the downside, overall I think the idea of slightly positive GDP numbers in H2 is a reasonable one.

  5. What do we need to see in the data over the next 3-6 months to remain comfortable with that forecast? Ed McKelvey discussed this issue in a daily comment earlier in the week and concluded that the most important markers are a) continued stabilization in retail sales and an end to the downtrend in auto sales, b) a drop in the initial claims numbers from the mid-600k range to 500k or less, and c) a pickup in the ISMs to the mid-40s.

  7. A GDP stabilization would undoubtedly be a big deal from a market perspective, but it would not be sufficient to end the deterioration in the labor market. We estimate that real GDP needs to grow by close to 3% in order to stabilize the unemployment rate, and that still seems a long way off. This is why we remain very concerned about a descent into deflation late next year, as I noted in Friday’s US Economics Analyst.