Friday, July 8, 2011

[Video] Goldman's Jan Hatzius Upgrades Chance of U.S. Recession in 2012 to 1 out of 5

While a technical recession in the U.S. is two quarters of negative GDP, for many there has never been an exit from recession.  Polls show this - often broadcasting that 60%ish of Americans believe we are still in a recession.  [Feb 17, 2011: 57% of Americans Still Think We are in Recession] A lot depends on where you are on the income totem pole.  Further, a lot depends on if you believe the government inflation figures.  Within GDP another inflation gauge is used (called a deflator) which is even lower than CPI most of the time.  [May 1, 2008: Is it an Official Recession?]  As inflation rises, GDP falls... so if you believe government is understating inflation by 2% or more, we've been in a recession the past 2 quarters.  The fact that government uses one type of  inflation for X reports, and another type for Y reports is just all part of living in the Matrix.

Whatever the case, even using the lenient government statistics for GDP, Goldman's Jan Hatzius has moved up the chances of a recession in 2012 to 15-20%.  While he has been as wrong as just about everyone on Wall Street with the talks of 4%+ GDP in 2011, he is still the most widely followed economist amongst the major banks due to a quite good track record. (relatively speaking)

Please note this video is BEFORE today's employment report

21 minute video

Some highlights:

  • Jan Hatzius, the chief U.S. economist of Goldman Sachs, started out the year among the most bullish economists on Wall Street about 2011 economic growth. Six months later, after a disappointing first half, he’s less optimistic and growing a little antsy about the risk of renewed recession.
  • In an interview with The Wall Street Journal, Mr. Hatzius said he saw a 15% to 20% chance of renewed recession next year. His baseline forecast is still for a resumption of stronger growth in the second half of 2011 and into 2012, but he has taken down his 3.5% to 4% forecast by a half percentage point and increased his unemployment rate forecast to 8.25% from 8% by the end of 2012.
  • If you were to see, over the next three months, an increase in the unemployment rate by say a half a percentage point or so, I would be pretty nervous about a renewed recession,” Mr. Hatzius said. “It is not our expectation, but that would that would make me fairly nervous.”
  • Goldman has been noting recently its “three-tenths rule.” Since World War II, an increase in the three-month moving average of the U.S. unemployment rate by more than 0.3 of a percentage point has always led to a much bigger increases in the unemployment rate and recession. The three-month average rate has increased by 0.07 percentage point since April. It would need to be sustained around 9.2% for several months for the rule to apply now.
  • Goldman economists were bullish early in the year because they believed that households had been making good progress in paying down their debts and were in a better position to resume spending. Mr. Hatzius said a combination of shocks from abroad and a softer underlying growth led its forecast astray for the first half of the year. But he said households are still making progress repairing their balance sheets, and therefore, he expects growth to pick up speed in the months ahead. “The progress that was evident six months ago is still visible,” he said.
  • On the policy front, Mr. Hatzius said he didn’t see the Federal Reserve raising interest rates until early 2013, and he doesn’t think it will restart its asset purchase program unless inflation slows and the economy fails to regain momentum. 


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