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Jan Hatzius jan.hatzius@gs.com 212 902 0394 Zach Pandl zach.pandl@gs.com 212 902 3393 Alec Phillips alec.phillips@gs.com 202 637 3746 Sven Jari Stehn jari.stehn@gs.com 212 357 6224 Andrew Tilton andrew.tilton@gs.com 212 357 2619 Shuyan Wu shuyan.wu@gs.com 212 902 3053 Maria Acosta-Cruz maria.acosta-cruz@gs.com 212 902 6709
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-8 47 52 57 62 67 72 77 82 87 92 97 02 07 Note: 2011Q2 is estimated from our GDP tracking. Source: BEA. GS Global ECS Research.
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2.5
US Economics Analyst
showed another sub-zero reading for both general business conditions and new orders (see Exhibit 2). And while the Empire State is still clearly in midcycle slowdown territory, final demand growth has slowed to a pace that is typically only seen in recessions. This is illustrated in Exhibit 3, which shows that real final sales to domestic purchasers that is, real GDP excluding inventories and net exportshas grown at an estimated rate of only % (annualized) in the first half of 2011. There is only one precedent for such a weak demand growth pace outside the immediate vicinity of a recession. One key question in coming months is whether final demand recovers to the 2%-2% pace that is probably Exhibit 3: Final Demand Was Exceptionally Weak in 2011H1
2-qtr annualized percent change 2-qtr annualized percent change 16
0.5 0.0
-8 47 52 57 62 67 72 77 82 87 92 97 02 07 Note: 2011Q2 is estimated f rom our GDP tracking. Source: BEA. GS Global ECS Research. -8
US Economics Analyst
2.5
80
3
0.0
70 60
-2.5
Real Domestic Final Sales (lef t) University of Michigan Consumer Sentiment (right) 50 40 85 90 95 00 05 10
necessary to keep GDP growth near trend and prevent the unemployment rate from rising more noticeably.1 Obviously, we have no hard information about Q3 in this regard yet, but Fridays preliminary consumer sentiment index for July from the University of Michigan was highly discouraging. The index fell to the lowest level since March 2009 (!) and is now back in territory normally associated with a contraction in real consumer spending and overall final demand (see Exhibit 4). Admittedly, consumer sentiment does not have much forward-looking value, and it is possible that the extensive media coverage of the negotiations around the federal debt ceiling has depressed sentiment. If so, agreement on this issuewhich we believe may be coming closercould lead to a rebound in sentiment. However, we would probably need to see a substantial improvement to undo the dramatic message of Exhibit 4, and to avert further downgrades to our GDP growth estimates in Q4 and 2012. Unfortunately, our confidence in the growth forecast remains relatively low. The bugbear is that we are still unsure about the precise reasons for the slowdown in 2011 to date, which is sharply at odds with our expectation at the end of last year that growth would accelerate in 2011. Logically, the explanation presumably has to involve a combination of a) unforeseen shocks from the Japan earthquake and the oil market, coupled with b) more vulnerability to these shocks, because c) the housing and credit market downturn is weighing on private-sector balance sheets for even longer than we thought. But the relative importance of these issues is exceptionally difficult to
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sort out, and it makes a great deal of difference for the outlook. The weaker data on economic activity have clearly raised the probability of renewed monetary easing by the Federal Reserve. In his monetary policy testimony this week, Chairman Bernankes main argument against renewed easing was that inflation is now significantly higher than it was in the summer of 2010. Indeed, the core CPI for June released on Friday showed a pickup in the 6-month annualized inflation rate to 2.5%, clearly above the mandate-consistent rate of 2% or a bit less. However, we may well have seen the highest inflation figures. Exhibit 5 shows that underneath the surface, both the median and trimmed-mean indexesstatistically based measures of underlying inflation that may be preferable to the better-known core CPIshowed a notable slowdown. Therefore, we still expect core inflation to slow substantially on a sequential basis over the next year. Moreover, if the economy returns to recessionnot our forecast, but clearly a possibility given the recent numbersFed 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, andlast but certainly not leastan increase in the size and/or composition of the Feds balance sheet.
Jan Hatzius
This assumes that real potential GDP growth is 2% and that the contribution from inventories and net trade adds up to between 0 and point.
US Calendar
Focus for the Week Ahead Housing activity was probably more or less flat in June, at least as measured by starts and existing home sales (July 19, 20). The Philadelphia Feds manufacturing survey should improve a tad from its dismal June reading, although the soft Empire State factory survey suggests that improvement will likely be small (July 21). Economic Releases and Other Events
Date Mon July 18 Tue Jul 19 Time (EST) 9:00 10:00 8:30 19:30 10:00 18:15 8:30 8:30 8:30 10:00 10:00 10:00 10:00 Indicator Net Long-Term TIC Data (May) Homebuilders Survey (Jul) Housing Starts (Jun) KC Fed Pres Hoenig spks on monetary policy at Fed conf Existing Home Sales (Jun) NY Feds Brian Sack spks to the Money Marketeers; NYC Chicago Fed Pres Evans spks to reporters in Chicago Initial Jobless Claims Continuing Claims Philadelphia Fed Survey (Jul) Leading Indicators (Jun) FHFA House Price Index (May) Bernanke testifies on Dodd-Frank Anniversary GS n.a. n.a. Flat Estimate Consensus Last Report +$40.0bn +$30.6bn 14 13 +2.7% Flat +2.9% -3.8%
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