One View of the Ups and Downs to Come

December 12th, 2011 at 2:43 pm

The researchers—not the traders!—at Goldman Sachs have an interesting, and pretty disheartening, new forecast out.

These things can change significantly with incoming data, but they basically have the economy getting a good bit better in the very short run—like now—and then fading out…AGAIN!

The top figure shows their unemployment rate forecast and below that, real GDP.

Source: Goldman Sachs, US Economics Analyst, 12/9/11 (no link)

They’ve got GDP growth accelerating pretty sharply as we speak (2011q4) only to crash next quarter, decelerating by almost 3%.  Why?

Despite improving data recently, we still expect growth to slow to about 1% in the first half of 2012. This deceleration is due to two factors. First, we expect the Euro-area crisis to weigh somewhat more heavily on growth than it has done so far, mainly via the financial channels. Second, we expect the pace of fiscal restraint to pick up in early 2012. We estimate that fiscal policy at the federal, state and local level subtracted about ½ percentage point from real GDP growth in the middle of 2011, but we expect this drag to increase to around 1 percentage point in early 2012. Even this assumes an extension of the temporary payroll tax cut currently scheduled to expire at end-2011. If it lapses, there would be an additional hit of ½-¾ percentage point to GDP growth in early 2012.

This renewed slowdown in growth results in the unemployment rate starting to climb next year.  That’s an awfully tough result for a workforce already battered for years by intractably high jobless rates (and a tough scenario for incumbents to run on…just sayin’).

A few caveats: First, as noted, incoming data are pretty volatile right now, and the confidence interval around these forecasts should reflect that.  Second, what you’re really seeing here are slight wiggles around a jobless rate stuck at about 9%, where it’s pretty much where it’s been since last spring.

But mostly what you’re seeing is the results of the policy freeze here and in Europe.  If GS is right about this quarter’s acceleration, it’s yet another crop of green shoots mowed down in its youth by political dysfunction generating terrible economic policy.

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One comment in reply to "One View of the Ups and Downs to Come"

  1. Tom Shire says:

    So according to Goldman-Sachs, the Obama’s payroll tax cut is worth 1/2-3/4% GDP growth. In other words, all it takes to increase GDP that much is a pay increase of $20-30/week (or $1,000-1,500/year).

    Too bad so many “job creators” prefer outsourcing jobs to paying their fellow Americans decent wages.


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