Goldman: This Is What A Sub-Par Recovery Looks Like


Still believe in the v-shaped recovery idea that was so popular, oh, about 2 months ago?

Wake up. That ship has sailed says Goldman’s Jan Catzius, whose latest report argues that we’re settling into a sub-par recovery.

From housing to labour, there’s just precious little evidence of a vigorous rebound.

See the full argument >>

Mediocre growth in Q3

Did you see the recent GDP report? Pretty unimpressive.

Real GDP grew only 2.8% (annualized) in the third
quarter, well below the ìadvanceî estimate of 3.5%
published a month ago. The downward revision is
consistent with other indications that the economic
recovery remains more moderate than had been
suggested by the ìadvanceî GDP release. These
include the weakness in the labour market and the
downbeat mood among small businesses. Indeed, we
continue to believe that the current set of economic
statistics is at risk of further downward revisions via
the annual ìbenchmarkingî process, as the
performance of small businesses is difficult to observe
for government statisticians in a timely manner.

There is also some evidence in the GDP release itself
that may point to further downward revisions
(although these may take considerable time to appear).
In the third quarter, real gross domestic income
(GDI)óa measure that is conceptually equivalent to
real GDP but can differ because of errors and
omissions in either seriesórose 0.8 percentage point
less than real gross domestic product. As shown in
Exhibit 1, real GDI has generally been even weaker
than real GDP over the past couple of years.
Although there is no way of knowing which series is
'correct' in any particular instance, GDI has often
proven to be a more accurate gauge in the past.1

It's true that existing home sales improved

We are seeing some signs of life in housing:

The recent housing news has been mixed. The good
news is that home salesóboth new and especially
existingóbeat expectations in October by a
significant margin. As shown in Exhibit 2, new home
sales rose 6.2%, while existing home sales surged
10.1% (on top of an 8.8% gain in September).
Undoubtedly, the recent home sales figures have
benefited from expectations that the homebuyer tax
credit might expire at the end of the year, and it is
likely that we will see some ìpaybackî in coming
months.responded so strongly to the tax credit must count as a
positive development.

But check out home prices

Sure, the volume of the housing market is up by some measures. But price is telling a different story. The Case-Shiller continues to disappoint, for example.

Moving over to the industrial sector, capital goods orders remain weak

So much for a sharp inventory correction:

The industrial news over the past couple of months
has been faintly disappointing. Although the
industrial sector is expanding, it appears that the
inventory cycle is already quite far advanced without
delivering quite as much of a ìkickî to production
growth as manyóincluding ourselvesóhad expected
3-6 months ago.

The reason seems to be that the positive impact from
the inventory cycle is being blunted by the continued
weakness in final demand. The October durable
goods release is a case in point. As shown in Exhibit
4, ìcoreî capital goods orders and shipments have
been going sideways to down over the past 4-5
months. Our interpretation is that the low level of
capacity utilization continues to keep capital spending
demand at rock-bottom levels, and we expect this to
change only very gradually over the next year.-40

And of course, hiring remains weak

Finally, we're not going to get anywhere in this economy without hiring. And so far, that's just not happening.

Perhaps the most positive signal of the past few weeks
has been the sharp drop in initial jobless claims, which
fell to 466,000 last week from the 550,000 area two
months ago. Although the level of initial claims
remains high, the pace of gross job losses is clearly
abating quickly.

However, there is much less sign of a meaningful
improvement in hiring, which typically is the more
important driver of cyclical labour market fluctuations.2
Indeed, household job market perceptions as measured
in the Conference Boardís consumer confidence
survey deteriorated a bit further in November, and the
newspaper help-wanted index declined to another
record low of 9 in September (see Exhibit 5).
Although newspaper job advertising is in secular
decline, we have found changes in this index
moderately useful for predicting employment; the
online help-wanted data from and the
Conference Board will be released next week.

If you think this is depressing, check out SocGen's guide to the end of the world >>

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