Goldman Sachs Group's economics team often plays the role of Wall Street's biggest pessimist. At the moment, that means predicting the U.S. economy will slow to a 1.5 percent growth rate for the rest of the year. A crawl, if you could call it that. Certainly not the kind of rebound you'd expect to feel coming out of a recession.
It's a "long-held view of ours (which many viewed very skeptically only two months ago!)," Andrew Tilton, one of Goldman's U.S. economists, wrote in an e-mail to The Fiscal Times. Indeed, it has been Goldman’s forecast since December 2009. But now many economists on Wall Street — even some of the best known bulls — also are becoming bearish. "There are a lot of doubts out there," says Phillip Swagel, a former assistant Treasury secretary for economic policy and now an economist at Georgetown’s McDonough School of Business.
As the year’s second half begins today, economics teams inside top banks have been revising their outlooks — downward. Citigroup lowered its estimate of second-half growth for the U.S. economy to 2.5 percent from 3 percent, citing housing weakness, and issued a research note to clients to brace themselves for more downgrades to come. Even one of the most optimistic economists on Wall Street, Ethan Harris of Bank of America Merrill Lynch, sees warning signs everywhere.
"As with Japan in the 1990s, the U.S. has a damaged banking system, deeply depressed real estate prices, near zero inflation and policies that are already aggressively expansionary,” Harris wrote recently. “Until the underlying wounds are healed, we believe the U.S. will remain vulnerable to shocks." That seems to suggest that his 3.4 percent growth forecast for the second half of 2010 may not bear out.
The recent spate of weak economic data, from shocking housing indicators to slowing corporate profits, makes downgrading the U.S. economy an obvious move, according to Lakshman Achuthan of the Economic Cycle Research Institute. "It reminds me about a segment Jon Stewart did about 'now casting.' How people very authoritatively pronounced what was already happening as their forecast," said Achuthan, who says he's been forecasting a downturn in growth since the beginning of the year. "The slowdown has already happened. They're simply 'now casting.'"
After a stunning 5.6 percent growth rate in the final quarter of 2009 — driven in part by the stimulus package — the U.S. economy is clearly losing steam. Last week, the Commerce Department said the economy grew by only 2.7 percent in the first quarter, rather than its estimate of 3 percent a month ago. Second quarter growth figures are scheduled to be released on July 30. On Tuesday, concerns about the global economy and a weak reading of consumer confidence in the U.S. sent the Standard & Poor’s 500 stock index down 3.1 percent.
Still, most banks are tipping only modestly negative and none are predicting a new decline into recession. "They're still hoping a little bit. Institutionally, it's very difficult for Wall Street to get bearish. The nature of the institution is to root for growth," said Achuthan. But even Goldman seems outright bullish compared to, say, Nobel prize-winning economist Paul Krugman, who declared in his New York Times column on June 28 that we've just entered a depression.
True bulls still roam Wall Street. Richard Berner of Morgan Stanley confidently says he is sticking to his 3.5 percent growth estimate for the second half of the year — well above the 3 percent consensus estimate. (At the beginning of the year, the consensus GDP estimate for the second half was just over 3.1 percent.) "We see underlying strength in incoming data, and believe that indicators such as jobless claims are increasingly disconnected from labor market fundamentals," Berner wrote.
Even modest pessimism has big consequences. Namely, jobs. With the unemployment rate at 9.7 percent, the Securities Industry and Financial Markets Association (SIFMA), Wall Street's main trade group, said that even a 3 percent economic growth rate would keep unemployment stubbornly high: 9.6 percent at the end of 2010 and 8.9 percent through 2011, according to its survey of 19 leading Wall Street economists published on June 22.
What could change things? A sudden wave of confidence by consumers to spend or businesses to hire. On June 25, Goldman wrote that consumer spending, which we rely on to purchase more than two-thirds of the nation's goods and services, will be even more important to economic growth than usual. That's because government stimulus spending and business inventory restocking are both fading.
But Goldman says not to hold your breath. Bank credit to consumers continues to be tight as banks experience a "modest rise" in their own funding costs. If the latest consumer confidence numbers are any indication, they may not be spending any time soon.
