By Bondsquawk:
Several weeks ago, we discussed that market consensus was playing catch up to the fall in interest rates. In his latest report posted on their website, Jan Hatzius, chief economist for Goldman Sachs suggests that forecasters continue to be in a state of denial and are playing the same game in terms of economic growth.
Over the last few months, the US economic indicators have shown a broad-based slowdown. Such a slowdown around the middle of 2010 has long seemed likely given the dependence of growth over the prior year on the boost from the inventory cycle and fiscal policy. Our forecast is that real GDP will grow at a 1½% (annualized) rate in the second half of 2010 and in early 2011, and the risks to it are tilted to the downside.
But the forecasting community has only partially caught up with the deterioration in the numbers. Last week's FOMC statement suggests that Fed officials still expect the economy to grow at a slightly above-trend rate over the next year or so. Likewise, most private forecasters predict that GDP will grow at roughly a trend rate in the second half of 2010 and a somewhat above-trend rate in 2011. If our view is correct, substantial further downward revisions are coming. In turn, these are likely to trigger downgrades to consensus earnings forecasts toward our strategists' more cautious views, as well as a return to large-scale asset purchases or other forms of "unconventional"? monetary policy by the Fed.
Will the economy in fact return to a technical recession, marked by declines in real GDP? We think the odds are still against such an outcome, but the risk is a substantial 25%-30%. In our view, this exceeds the likelihood of the trend/above-trend growth scenario envisaged in the consensus forecast.
Hatzius points out three major indicators that signal the slowdown for the U.S. economy.
Hatzius concludes that the recent economic activity was driven by temporary factors such as inventory replenishment and federal stimulus measures.
A slowdown around the middle of the year has long seemed likely given the dependence of GDP growth since mid-2009 on the boost from the inventory cycle and fiscal policy. Over the last four quarters, the swing from inventory liquidation to accumulation has contributed 1.9 percentage points to real GDP growth, and overall fiscal policy"â?federal, state, and local"â?has contributed a little over 1 percentage point to real final demand growth. These two numbers are additive, which implies that almost all of the 3.2% growth in real GDP over the past year was due to temporary factors, and that final demand excluding the impact of fiscal policy grew by less than ½% over the past year. (Final demand excluding the impact of federal fiscal policy but including the impact of state and local policy has declined slightly.)
Given these relatively easy-to-measure factors"â?and given that it is difficult to tell a compelling story for why underlying final demand growth should accelerate sharply from here"â?we find forecasts that do not look for GDP growth well below trend quite implausible. If the inventory and fiscal effect in combination are zero, which is a relatively generous assumption in our view, underlying final demand growth would need to accelerate by more than 1 percentage point to reach even our 1½% growth pace for real GDP growth.
Nevertheless, most official and private forecasters still expect trend or above-trend growth. Last week's FOMC statement noted that ""?the Committee anticipates a gradual return to higher levels of resource utilization"?,"? which we interpret as growth of around 3% coupled with a modest decline in the unemployment rate to 9% or a bit below over the next year. And according to the August 2010 survey by Blue Chip Economic Indicators, Inc., the average private-sector forecaster still expects real GDP growth of 2.4% in the third quarter, 2.7% in the fourth quarter, and 3% in 2011 (on a Q4/Q4 basis), as well as a drop in the unemployment rate from 9.5% now to 8.8% at the end of 2010. We believe that the GDP forecasts will need to fall by at least 1 percentage point and the unemployment rate forecast will need to rise by at least 1 percentage point. As we discussed recently, such GDP revisions are likely to trigger downward revisions to the consensus forecast for corporate earnings toward our strategists' more cautious views (see Andrew Tilton, "Reconciling "?Micro' Strength with "?Macro' Weakness,"? US Economics Analyst, 10/32, August 13, 2010). They are also likely to persuade the Federal Reserve to resume large-scale asset purchases or engage in other forms of "unconventional"? monetary policy.
â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
A brief note on comments â?? The increase in users in recent months has resulted in an increase in unproductive comments. Any user who engages in the use of racial epithets or uses the comment section as a place to insult other users will be banned from the site. The comment section is welcome to all readers who are interested in asking pertinent questions and/or engaging in thoughtful, intelligent, and productive debate. In short, just be nice. Thanks.
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The interesting thing is that the GS economists still forecast something like 1250 for the SP500 by year end. How do they reconcile Janâ??s views with that forecast? I wonder if Jan has lower estimates but it is bumped up senior management so as to not affect trading business by clients.
Yes itâ??s very odd to say the least. Hatzius and David Kostin appear to be on differing sides of this debate. Kostinâ??s latest note calls for SP 1200 by year-end while Hatzius is becoming increasingly gloomy.
Jan Hatzius is Chief US economist. He does not make equity market forecasts, but does make interest rate forecasts on treasuries.
David Kostin is US portfolio strategist, not an economist. Me makes equity market forecasts.
David and Jan â??talkâ?, but are under no obligation to â??agreeâ? on anything. David usually takes Janâ??s economic forecasts more or less at face value, i.e. he has no reason to disagree other than his â??gutâ?.
The confusion is that â??peopleâ? think that there is such a thing as â??Goldman Sachsâ?? point of view or opinionâ?. There is no such thing. Every analyst, economist and desk that publishes is free to their own opinions, and free to espouse them. There is no â??Central arbiterâ? or anything remotely like that. IF a Goldman Sachs sell side analyst slaps a â??buyâ? on something that Goldman Sachs, e.g. proprietary trader, is â??shortâ?, so be it.
Pod, thanks for your informed reply.
I Googled other comments by Kostin/Jan and Kostin acknowledged that the macro view was pessimistic (ala Jan) but his micro work pointed to the fact that even in the pessimistic scenario, equity markets donâ??t do too badly. He argued using favorable micro factors like companies having cash, decent balance sheets (ex-finance I suppose) and interestingly, the fact that companies have been thru a crisis so they would be flexible in terms of responding to the economic conditions. I think Kostin is trying not to be too pessimistic on the whole market, which may not be such a bad/unreasonable position.
How is this a surprise to anyone? Youâ??ve posted plenty of research pieces about the overly strong GDP numbers we were getting in Q4-09 and Q1-10.
http://pragcap.com/4-reasons-the-good-gdp-is-worse-than-it-looks
I would add that the problems are more pervasive than that. The analysts are overly optimistic about just about everything. Estimates for housing, manufacturing, earnings, etc will likely all be coming down in the next few monthsâ?¦.
I find it interesting due to the contradiction with the 1200+ S&P call. Looks like the tempering of another Bulls stance.
This is part of what has bugged me listening to the talking heads lately. It seems as though everyone is attempting to explain away the bad economic numbers by saying â??we all new the economy was going to slow as stimulus is removed, this is nothing unexpected, itâ??s already reflected in the market!â? Move along folks, nothing to see here. This is ridiculous. If the recent economic data was really expected, and to a good extent â??priced in,â? why are all the major firms GDP and earnings estimates so high? The math doesnâ??t add up. If fund managers were really anticipating the recent downturn why are their cash assets back to record lows? Pants Wearing Monkeys have a great talent for saying one thing, and saying it with great amounts of apparent conviction, but doing something different.
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By Bondsquawk:
Several weeks ago, we discussed that market consensus was playing catch up to the fall in interest rates. In his latest report posted on their website, Jan Hatzius, chief economist for Goldman Sachs suggests that forecasters continue to be in a state of denial and are playing the same game in terms of economic growth.
Over the last few months, the US economic indicators have shown a broad-based slowdown. Such a slowdown around the middle of 2010 has long seemed likely given the dependence of growth over the prior year on the boost from the inventory cycle and fiscal policy. Our forecast is that real GDP will grow at a 1½% (annualized) rate in the second half of 2010 and in early 2011, and the risks to it are tilted to the downside.
But the forecasting community has only partially caught up with the deterioration in the numbers. Last week's FOMC statement suggests that Fed officials still expect the economy to grow at a slightly above-trend rate over the next year or so. Likewise, most private forecasters predict that GDP will grow at roughly a trend rate in the second half of 2010 and a somewhat above-trend rate in 2011. If our view is correct, substantial further downward revisions are coming. In turn, these are likely to trigger downgrades to consensus earnings forecasts toward our strategists' more cautious views, as well as a return to large-scale asset purchases or other forms of "unconventional"? monetary policy by the Fed.
Will the economy in fact return to a technical recession, marked by declines in real GDP? We think the odds are still against such an outcome, but the risk is a substantial 25%-30%. In our view, this exceeds the likelihood of the trend/above-trend growth scenario envisaged in the consensus forecast.
Hatzius points out three major indicators that signal the slowdown for the U.S. economy.
Hatzius concludes that the recent economic activity was driven by temporary factors such as inventory replenishment and federal stimulus measures.
A slowdown around the middle of the year has long seemed likely given the dependence of GDP growth since mid-2009 on the boost from the inventory cycle and fiscal policy. Over the last four quarters, the swing from inventory liquidation to accumulation has contributed 1.9 percentage points to real GDP growth, and overall fiscal policy"â?federal, state, and local"â?has contributed a little over 1 percentage point to real final demand growth. These two numbers are additive, which implies that almost all of the 3.2% growth in real GDP over the past year was due to temporary factors, and that final demand excluding the impact of fiscal policy grew by less than ½% over the past year. (Final demand excluding the impact of federal fiscal policy but including the impact of state and local policy has declined slightly.)
Given these relatively easy-to-measure factors"â?and given that it is difficult to tell a compelling story for why underlying final demand growth should accelerate sharply from here"â?we find forecasts that do not look for GDP growth well below trend quite implausible. If the inventory and fiscal effect in combination are zero, which is a relatively generous assumption in our view, underlying final demand growth would need to accelerate by more than 1 percentage point to reach even our 1½% growth pace for real GDP growth.
Nevertheless, most official and private forecasters still expect trend or above-trend growth. Last week's FOMC statement noted that ""?the Committee anticipates a gradual return to higher levels of resource utilization"?,"? which we interpret as growth of around 3% coupled with a modest decline in the unemployment rate to 9% or a bit below over the next year. And according to the August 2010 survey by Blue Chip Economic Indicators, Inc., the average private-sector forecaster still expects real GDP growth of 2.4% in the third quarter, 2.7% in the fourth quarter, and 3% in 2011 (on a Q4/Q4 basis), as well as a drop in the unemployment rate from 9.5% now to 8.8% at the end of 2010. We believe that the GDP forecasts will need to fall by at least 1 percentage point and the unemployment rate forecast will need to rise by at least 1 percentage point. As we discussed recently, such GDP revisions are likely to trigger downward revisions to the consensus forecast for corporate earnings toward our strategists' more cautious views (see Andrew Tilton, "Reconciling "?Micro' Strength with "?Macro' Weakness,"? US Economics Analyst, 10/32, August 13, 2010). They are also likely to persuade the Federal Reserve to resume large-scale asset purchases or engage in other forms of "unconventional"? monetary policy.
â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??â??
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
A brief note on comments â?? The increase in users in recent months has resulted in an increase in unproductive comments. Any user who engages in the use of racial epithets or uses the comment section as a place to insult other users will be banned from the site. The comment section is welcome to all readers who are interested in asking pertinent questions and/or engaging in thoughtful, intelligent, and productive debate. In short, just be nice. Thanks.
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The interesting thing is that the GS economists still forecast something like 1250 for the SP500 by year end. How do they reconcile Janâ??s views with that forecast? I wonder if Jan has lower estimates but it is bumped up senior management so as to not affect trading business by clients.
Yes itâ??s very odd to say the least. Hatzius and David Kostin appear to be on differing sides of this debate. Kostinâ??s latest note calls for SP 1200 by year-end while Hatzius is becoming increasingly gloomy.
Jan Hatzius is Chief US economist. He does not make equity market forecasts, but does make interest rate forecasts on treasuries.
David Kostin is US portfolio strategist, not an economist. Me makes equity market forecasts.
David and Jan â??talkâ?, but are under no obligation to â??agreeâ? on anything. David usually takes Janâ??s economic forecasts more or less at face value, i.e. he has no reason to disagree other than his â??gutâ?.
The confusion is that â??peopleâ? think that there is such a thing as â??Goldman Sachsâ?? point of view or opinionâ?. There is no such thing. Every analyst, economist and desk that publishes is free to their own opinions, and free to espouse them. There is no â??Central arbiterâ? or anything remotely like that. IF a Goldman Sachs sell side analyst slaps a â??buyâ? on something that Goldman Sachs, e.g. proprietary trader, is â??shortâ?, so be it.
Pod, thanks for your informed reply.
I Googled other comments by Kostin/Jan and Kostin acknowledged that the macro view was pessimistic (ala Jan) but his micro work pointed to the fact that even in the pessimistic scenario, equity markets donâ??t do too badly. He argued using favorable micro factors like companies having cash, decent balance sheets (ex-finance I suppose) and interestingly, the fact that companies have been thru a crisis so they would be flexible in terms of responding to the economic conditions. I think Kostin is trying not to be too pessimistic on the whole market, which may not be such a bad/unreasonable position.
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