On Friday, Goldman’s Jan Hatzius downgraded the US economy.
Following another week of weak economic data, we have cut our estimates for real GDP
growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from
2% and 3.25%. Our forecasts for Q4 and 2012 are under review, but even excluding
any further changes we now expect the unemployment rate to come down only
modestly to 8¾% at the end of 2012.
What, specifically, prompted the worry? Two specific datapoints this week
- The latest Empire Manufacturing Index went into shrinkage for the second straight month. More worrisome is that end demand is clearly tanking (see chart below).
- Friday’s University of Michigan Consumer Sentiment Survey was “highly discouraging,” The index fell to its lowest level since March 2009!
What’s more: Hatzius says he doesn’t really know the cause of the slowdown, but that clearly the odds of further Fed intervention have heightened.
Moreover, if the economy returns to recession—not our forecast, but clearly a possibility given the recent numbers—Fed officials would undoubtedly ease anew even if inflation is close to their target. Indeed, Chairman Bernanke laid out the possible options for such a move in his monetary policy testimony this week, namely a change in the forward-looking language in the FOMC statement, a cut in the interest rate on excess reserves, and—last but certainly not least—an increase in the size and/or composition of the Fed’s balance sheet.
Meanwhile, here’s what that collapse in end demand looks like:
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