Having announced with much fanfare last week a new, more positive view on the US economy, Goldman Sachs is back-tracking ever so slightly.
Now, the bank still thinks real GDP growth of 2.7 per cent next year and 3.6 per cent the year is the most likely outcome, but it also wants to considering the threats to its outlook:
Following last week’s upgrade and extension of our US economic outlook, we examine the risks to the new view. We believe these risks are roughly balanced around a central case that we regard as the most likely among a range of possible outcomes (i.e., the mode of the distribution).
In setting our outlook, we aim to forecast the modal outcome—the scenario that we think has the highest probability. As such, the outlook need not have risks (in a forecasting sense) that are balanced. That said, we try whenever when possible to choose a path that has both upside and downside. In this our latest forecast, we believe we have achieved this objective.
Anyway, there are three things that have been worrying Goldman’s economist Ed McKelvey:
- Renewed house price declines that could trigger a double dip recession.
- Spill over from the eurozone debt crisis.
- US lawmakers failing to extend the Bush-era tax cuts.
Ed may have rather less to worry about on the third issue now. But it is only renewed house price declines that really concern McKelvey:
Given the magnitude of the financial shock most households endured in the values of their homes (and their net worth in general) between 2006 and 2009, our brighter forecast is vulnerable to the renewed setbacks in home prices that have begun to show up in the wake of the homebuyer tax credit. We now expect home prices to fall by 5% or a bit more over the next 12 months and to change little for another year or more; this is somewhat weaker than the 3½% two-year decline that we previously expected as we are better able to isolate the role of the homebuyer tax credit in helping stabilize prices as this event recedes into the past. Compared with the much larger drop in home prices seen between 2006 and 2009, this renewed setback will probably strike most homeowners as a manageable if unpleasant development, especially if the economy in general and the labor market in particular continue to improve.
But the risk of renewed consumer retrenchment cannot be dismissed, particularly if the house price weakness turns out to be more than we now expect. If that were to happen, then real consumer spending would weaken—possibly even decline, depending on the severity of the house price declines and the other main drivers of spending (and perhaps bank lending as well). In turn, this could prompt a stall in US economic activity or even a mild recession, although the currently low level of activity in cyclical sectors such as residential investment and business equipment spending would provide some protection against a “double dip.”
Some but not much, we would guess. And look out for Roubini’s latest warning on $1,000bn of banking losses from this double-dip.
However, it would be remiss of us not to mention the upside risks to Goldman’s GDP forecasts, such as possibility that US companies start to spend all the cash they have been hoarding, and if fiscal policy follows a less restrictive path:
Although the utilization of existing capacity remains low relative to historical norms, significant increases in utilization could till prompt companies to spend more on new equipment, especially since the alternative is to earn next to nothing on short- and intermediate-term investments. They could also step up the pace of hiring more quickly than we now anticipate. Since this forecast risk is not tied to a specific event, it could come in any size and at any time, and is therefore impossible to quantify with precision. Suffice it to say that we could easily see the US growth rate rise more decisively above its potential range (2½%-3%) earlier in 2011 than we now expect, possibly with a quicker drop in unemployment or a larger reentry of discouraged workers into the labor force. Currently, we do not see this strong a positive growth dynamic developing until late 2011.
Which also gives Goldman plenty of time to carry on tweaking its bets before then. Most convenient.