Back in October, when Goldman revised its 2022 GDP estimate from an euphoric 3.6% to a still euphoric 3.3%, we said that this assessment was dead wrong, as it was predicted on the overly optimistic assumption that the US consumer would remain solid thanks to generous spending of “excess savings” (the biggest lie about the post-covid recovery is that US society ended up with over $2 trillion in excess savings, when in reality it was just a handful of ultra rich that benefited from government generosity) which would never materialize. Instead we said that “the contribution to consumption from excess savings will end up being far smaller than most Wall Street strategists predict (since the propensity of the top 1% to spend their savings which are instead invested in the market, is far less than the broader population).” As a result, we also told readers to “expect even more aggressive cuts to GDP growth in coming quarters – from both Goldman and its peers – even as inflation continues to rise, cementing a painful period of non-transitory stagflation for the US as the mid-term elections approach.“
Well fast forward to today, when on Thursday night the vampire squid just confirmed we were right – again – when unleashed its most draconian GDP cut yet, saying when it – again – downgraded its US GDP forecast “to reflect higher oil prices and other drags on growth related to the war in Ukraine”, or said otherwise, to reflect the woeful state of the US consumer which it was completely wrong about 5 months ago and is now blaming it on, who else, Vladimir Putin.
Of course, Goldman can’t admit that its entire bullish case was wrong from the beginning so instead it blames it on exogenous factors, the same factors which we have been saying for the past 6 months are pushing the US in a stagflationary recession (if not depression) as a result of dismal monetary, fiscal and energy policy, whose dire outcomes were merely precipitated by the Russian invasion of Ukraine.
According to Goldman chief economist Jan Hatzius, “oil and commodity prices have risen sharply since Russia invaded Ukraine. Our commodity strategists’ near-term crude oil and agricultural commodity forecasts imply an effective 0.7% drag on real disposable income that will weigh on spending in 2022.”
Goldman, which earlier today noted that global financial conditions are suddenly the tightest they have been in the past decade as a result of soaring commodity prices and interest rates, also expects “modest drags on growth from further tightening of financial conditions, lower consumer sentiment, and slower growth in Europe, and see additional downside risks if shortages of key metals constrain US production.”
As a result, Goldman slashes its GDP growth forecast as follows:
- Q1 2022 to +0.5% vs 1.0% previously
- Q2 2022 to +1.5% vs 2.5% previously
- Q3 2022 to +2.5% vs 2.5% previously
- Q4 2022 to +2.5% vs 2.0% previously
Compare this to what Goldman predicted in October:
- Q1 2022 to 4.5 vs 5.0% previously
- Q2 2022 to 4% vs 4.5% previously
- Q3 2022 to 3% vs 3.5% previously
- Q4 2022 to 1.75% vs. 1.5% previously
In other words, in 5 months Goldman has gone from 5.0% in Q1 to 0.5%. And that’s why Goldman’s economists are millionaires. Alternatively you could have simply read the following article we published at around the same time, “The Fed Just Started The Countdown To The Next Recession: Here’s When It Will Strike“, to know what is really going to happen.
As for the full year, the bank is lowering its 2022 real GDP growth forecast to +1.75% on a Q4/Q4 basis vs. +2.0% previously, and 1 percent below the consensus of 2.7%. Compared to the bank’s 2022 GDP forecast in October, it just around 50% off the 3.3% GDP forecast then, and when we said this number will collapse precipitously. Once again, we were right and Goldman was wrong.
And finally, while Goldman still won’t admit what is patently obvious to anyone, namely that a stagflationary recession will be here in a few months, when both Q1 and Q2 GDP print negative as CPI prints double digits, the bank at least breaches the topic of recession probability, and for the first time says that it now “sees the risk that the US enters a recession during the next year as broadly in line with the 20-35% odds currently implied by models based on the slope of the yield curve.”
For the record, we see odds that the US enters recession this year at 100%. And once that happens, the Fed will go all in…
Admitting that its forecast will be overly optimistic yet again, the bank concedes that “even after these downgrades, we still see risks around our growth forecast as skewed to the downside, particularly if sanctions escalate or if oil prices rise even further, for example, to the $175/bbl price target our commodity strategists see as possible if supply losses reach 4mb/d. Additionally, we have not assumed any growth hit due to metal shortages since — aside from palladium — only a small share of US commodity demand is met by Russian exports. However, if supply chain disruptions lead to challenges in sourcing key metals and other inputs that constrain production (as has already occurred for some European automakers), the negative growth impact could be more substantial.”
Reading between the lines, it appears that Goldman agrees with our “recession assured” call, a call we have absolute certain in after Janet Yellen said she sees none.
*YELLEN: I DON’T EXPECT A RECESSION IN THE U.S.
Finally, Goldman also nudged up its year-end unemployment rate forecast to 3.5% (vs. 3.4% previously) to reflect “the worse growth outlook, but still expect healthy job gains in 2022 despite fairly weak GDP growth due to strong labor demand.” Here too, we disagree, and see double digit unemployment once the recession transforms into a global depression.