Goldman Downgrades Forecasts
Some pretty sobbering forecasts from Goldman Sachs means more bad news is on the way. Highlights to me are the fact we could go over 9% unemployment (meaning 50% more people will be without a job than today), and that inflation will be negative (but they say this is not really the "D" word). The bolding is mine...
BOTTOM LINE: We have marked down our forecasts for US real GDP in response to continuing signs of falling domestic and foreign demand, labor market deterioration, renewed tightening in financial conditions, and an apparent impasse in fiscal policy pending the transfer of power to the Obama administration in late January. As a result, we expect the unemployment rate to reach 9% by the fourth quarter of 2009, profits to fall 25% for 2009 as a whole following an estimated 10% drop this year, and the Federal Open Market Committee (FOMC) to use nontraditional policy tools more aggressively, as detailed below.
MAIN POINTS:
1. A weaker growth profile...We now estimate that real GDP is falling at a 5% annual rate in the current quarter, and we expect this to be followed by declines of 3% and 1% in the next two quarters. This deepens and extends the expected recession, bringing the drop in GDP close to the decline seen in 1982 (2.3% in our forecast versus 2.7% then). Previously we had estimated changes of -3.5%, -2%, and zero, respectively. In the second half of 2009, we expect growth to average 1%, only slightly less than before.
2. …due mainly to fiscal policy stagnation...Although persistent downside surprises are a major driver of the current-quarter adjustment, the main reason for the downgrade to our forecast is the policy impasse that has developed in Washington and the tightening in financial conditions it has provoked. It is now reasonably clear that a second fiscal package will not be enacted until after the Obama administration takes office in late January. Other potential measures of support -- deployment of TARP funds and more aggressive expansion by the GSEs, for example -- likewise await the transfer of power. Although the probability is rising that the next round of fiscal stimulus will ultimately exceed the $200bn we have been assuming, we have not incorporated this into our forecast because the timing and magnitude remain unclear. At the moment, any significant impact seems unlikely until 2009 Q2 at the earliest.
3. …results in a postwar record increase in unemployment...Given the lower expected profile of real GDP, we now forecast that the unemployment rate will reach 9% by year-end 2009, half a point higher than our previous forecast. With very little reason to think that the US economy will return to trend growth in 2010, we expect further increases in unemployment during that year. This forecast, if correct, makes the current recession unequivocally the worst single downturn on record since World War II insofar as increases in joblessness are concerned, and it raises the prospect that this recession could eventually exceed the 5-point cumulative increase posted during the double-dip recessions of 1980 and 1981-1982 combined.
4….a sharper slowing in inflation…As the economy contracts, inflation pressure has started to ease. This was evident in the latest CPI, which produced the first drop in the core (ex food and energy) index since 1982, when a different computation of housing costs made the index more sensitive to interest-rate movements. With real GDP now expected to drop more sharply we have marked down our forecasts for year-to-year core inflation by the end of 2009 by about 1/4 percentage point, to 1.2% for the CPI and 1.0% for the PCE (personal consumption expenditure) index. With energy prices dropping sharply and some evidence of softening in food prices as well, we now show a more meaningful year-to-year drop in the (headline) CPI for all items to about -1.4% in the third quarter of 2009. However, we do not expect a broad-based, sustained pattern of significant price decline that would normally be associated with the term "deflation" over the forecast horizon.
5. …a record decline in aftertax profits…The combination of weaker real activity and slower inflation means that profits of US companies will fall even more sharply than we had previously expected. Specifically, we now forecast that aftertax economic profits will fall 25% in 2009 (annual average basis), which would mark the biggest drop since 1938. Previously, we had expected a 20% drop for 2009.
6. …a resort to unconventional policy tools as the FOMC struggles to remain ahead of the curve…We continue to expect the FOMC to cut the federal funds rate target by 50 basis points (bp), to 50bp, at its next meeting on December 16, if not before. Although a subsequent rate cut to zero is not out of the question, we think that the committee will turn to unconventional policy tools more openly to remain aggressive in attempting to support the economy and financial markets. Specifically, we expect the committee to precommit to maintaining short-term interest rates at a low level for a "considerable period of time" (or language to that effect) and to attempt to push longer-term interest rates down by purchasing longer-dated Treasury obligations more aggressively. In executing these policies, we expect the Fed's balance sheet to increase further, from the $2.2 trillion to which it has risen over the past two months.
7…and a flattening yield curve. Although we do not forecast deflation, the fear of this outcome has clearly risen in the financial markets. This, coupled with the Fed's efforts to flatten the yield curve, implies a much lower profile for the yield on 10-year Treasury notes. We now expect that this yield will fall to 2-3/4% by the end of the first quarter of 2009, as compared to 3-1/2% previously. Thereafter, signs that the US economy is stabilizing will likely cause these rates to rise to 3.6% by year-end (versus 4% previously).
BOTTOM LINE: We have marked down our forecasts for US real GDP in response to continuing signs of falling domestic and foreign demand, labor market deterioration, renewed tightening in financial conditions, and an apparent impasse in fiscal policy pending the transfer of power to the Obama administration in late January. As a result, we expect the unemployment rate to reach 9% by the fourth quarter of 2009, profits to fall 25% for 2009 as a whole following an estimated 10% drop this year, and the Federal Open Market Committee (FOMC) to use nontraditional policy tools more aggressively, as detailed below.
MAIN POINTS:
1. A weaker growth profile...We now estimate that real GDP is falling at a 5% annual rate in the current quarter, and we expect this to be followed by declines of 3% and 1% in the next two quarters. This deepens and extends the expected recession, bringing the drop in GDP close to the decline seen in 1982 (2.3% in our forecast versus 2.7% then). Previously we had estimated changes of -3.5%, -2%, and zero, respectively. In the second half of 2009, we expect growth to average 1%, only slightly less than before.
2. …due mainly to fiscal policy stagnation...Although persistent downside surprises are a major driver of the current-quarter adjustment, the main reason for the downgrade to our forecast is the policy impasse that has developed in Washington and the tightening in financial conditions it has provoked. It is now reasonably clear that a second fiscal package will not be enacted until after the Obama administration takes office in late January. Other potential measures of support -- deployment of TARP funds and more aggressive expansion by the GSEs, for example -- likewise await the transfer of power. Although the probability is rising that the next round of fiscal stimulus will ultimately exceed the $200bn we have been assuming, we have not incorporated this into our forecast because the timing and magnitude remain unclear. At the moment, any significant impact seems unlikely until 2009 Q2 at the earliest.
3. …results in a postwar record increase in unemployment...Given the lower expected profile of real GDP, we now forecast that the unemployment rate will reach 9% by year-end 2009, half a point higher than our previous forecast. With very little reason to think that the US economy will return to trend growth in 2010, we expect further increases in unemployment during that year. This forecast, if correct, makes the current recession unequivocally the worst single downturn on record since World War II insofar as increases in joblessness are concerned, and it raises the prospect that this recession could eventually exceed the 5-point cumulative increase posted during the double-dip recessions of 1980 and 1981-1982 combined.
4….a sharper slowing in inflation…As the economy contracts, inflation pressure has started to ease. This was evident in the latest CPI, which produced the first drop in the core (ex food and energy) index since 1982, when a different computation of housing costs made the index more sensitive to interest-rate movements. With real GDP now expected to drop more sharply we have marked down our forecasts for year-to-year core inflation by the end of 2009 by about 1/4 percentage point, to 1.2% for the CPI and 1.0% for the PCE (personal consumption expenditure) index. With energy prices dropping sharply and some evidence of softening in food prices as well, we now show a more meaningful year-to-year drop in the (headline) CPI for all items to about -1.4% in the third quarter of 2009. However, we do not expect a broad-based, sustained pattern of significant price decline that would normally be associated with the term "deflation" over the forecast horizon.
5. …a record decline in aftertax profits…The combination of weaker real activity and slower inflation means that profits of US companies will fall even more sharply than we had previously expected. Specifically, we now forecast that aftertax economic profits will fall 25% in 2009 (annual average basis), which would mark the biggest drop since 1938. Previously, we had expected a 20% drop for 2009.
6. …a resort to unconventional policy tools as the FOMC struggles to remain ahead of the curve…We continue to expect the FOMC to cut the federal funds rate target by 50 basis points (bp), to 50bp, at its next meeting on December 16, if not before. Although a subsequent rate cut to zero is not out of the question, we think that the committee will turn to unconventional policy tools more openly to remain aggressive in attempting to support the economy and financial markets. Specifically, we expect the committee to precommit to maintaining short-term interest rates at a low level for a "considerable period of time" (or language to that effect) and to attempt to push longer-term interest rates down by purchasing longer-dated Treasury obligations more aggressively. In executing these policies, we expect the Fed's balance sheet to increase further, from the $2.2 trillion to which it has risen over the past two months.
7…and a flattening yield curve. Although we do not forecast deflation, the fear of this outcome has clearly risen in the financial markets. This, coupled with the Fed's efforts to flatten the yield curve, implies a much lower profile for the yield on 10-year Treasury notes. We now expect that this yield will fall to 2-3/4% by the end of the first quarter of 2009, as compared to 3-1/2% previously. Thereafter, signs that the US economy is stabilizing will likely cause these rates to rise to 3.6% by year-end (versus 4% previously).
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