It’s official: while Q2 was the best quarter for the economy in decades, in Q3 it is now widely accepted that as we wrote a month ago, the wheels came off as a result of a “sudden negative change.”
One doesn’t have to look too hard to find out why: between Friday’s catastrophic jobs report, the near record plunge in consumer confidence, the sharp contraction in retail sales where reports have missed expectations for 3 months in a row, whether it is due to the end of stimmies or the recent restrictions from the Delta variant, one bank after another took a machete, or in the case of Morgan Stanley, a nuke to their GDP Q3 forecast, with he bank on Thursday cutting its Q3 GDP to just 2.9% from 6.5% previously.
It got so bad that the NY Fed on Friday unexpectedly announced that it was suspending its GDP Nowcast tracker, as the underlying numbers had gotten so bad volatile, the central bank’s economists were ashamed to use them for analysis as the product would have been ugly for the Biden admin:
The uncertainty around the pandemic and the consequent volatility in the data have posed a number of challenges to the Nowcast model. Therefore, we have decided to suspend the publication of the Nowcast while we continue to work on methodological improvements to better address these challenges.
But while the US central bank can pretend away bad numbers as if they simply don’t exist – or are “too volatile” – especially if their discussion would impair the fake recovery narrative said central bank is busy constructing, investment banks don’t have that luxury, and late on Monday – with the US on holiday – Goldman did precisely what we said it would do last week, and in a note titled “A Harder Path Ahead” published by its economics team, cut its Q3 GDP forecast for the third time in the past month. As a reminder, this is how Goldman reached the “startling” conclusion that the US economy was headed for a brick wall, which we first revealed to our readers back on August 13 when we said that “A Sudden Negative Change In The Economy”, something the big banks would then proceed to realize in the coming days, to wit:
- On August 18, Goldman cuts its laughable Q3 GDP forecast from 8.5% to 5.5%, while expecting a “bigger inflation surge” (a clear warning that stagflation is coming), as “the impact of the Delta variant on growth and inflation is proving to be somewhat larger than we expected.” Yes, it’s al Delta’s fault that US consumers were all tapped out, as we warned one week earlier.
- On Thursday, Sept 2, Goldman cuts Q3 GDP estimate for the second time from 5.5% to 3.5%, “to reflect the slower pace of manufacturing and trade inventory growth in July as well as the implications of sharply lower Auto SAAR in August.”
- And then just 4 days later, on Sept 6, under the cover of the Memorial Day holiday, Goldman just cut its Q3 GDP forecast for the third time, and while the bank kept its Q3 GDP forecast at 3.5%, it is now starting to cut its outer forecasts, starting with Q4 GDP which it now sees at 5.5%, down from 6.5%, which means that on annual average basis, the bank’s GDP growth forecast is now 5.7% (vs. 6.2% consensus) in 2021 and 4.6% (vs. 4.3% consensus) in 2022, but as Goldman’s Jan Hatzius notes, “the annual average masks a sharp deceleration to below trend by end-2022.”
While it hardly matters – after all, the bank will just find another goalseeked justification to cut its projections even more in a few weeks time as the economy slows down even more – here, for the first time, Goldman admits that it expects the Delta setback “to be brief”, while two longer-standing concerns pose challenges for consumption growth over the next few quarters:
First, as we have been warning repeatedly in recent weeks, Goldman warns that “the fiscal impulse will fade sharply from its Q2 peak through end-2022.” Translation: no more stimmies. Fiscal support boosted disposable income to 9% above the pre-pandemic trend on average in 2021H1, but has already dropped off substantially. This decline will weigh on spending, though the impact should be offset by strong gains in labor income – which should keep disposable income modestly above its pre-pandemic trend- and by spending of excess savings built up during the pandemic, which amount to 18% of a year’s consumption.
Second, consumers will need to rotate from a very elevated level of spending on goods back to a normal level of spending on services. Spending on goods will continue falling, though delayed purchases due to shortages of items such as new cars should slow the decline. But the rest of the service sector recovery will be much slower than the easy phase that followed vaccination, and with Covid fears likely to persist through the winter virus season, Goldman warns that it might take a while for spending to recover in still-depressed categories such as very high-contact and office-adjacent services.
Bottom line, sophisticated sounding econobabble aside, simply judging by the frequency of its forecast “revision”, Goldman is totally clueless about what happens next and will thus keep revising its forecasts to comply with the narrative du jour. One thing we do know however is that stimmies are over, extended benefits are done, $2 trillion in excess savings have been mostly spent, profit margins are at all time highs and with stagflation on deck, can only slide, which means that either the Fed will soon do even more QE (it may of course taper first but that will simply accelerate the coming easing), or else we are looking at a major hit to both the economy and also the fake capital markets that now reflect just the Fed’s daily CTRL-P.
