“The Biggest Decline Ever”: Goldman Now Sees US GDP Crashing 34% In Q2

Tuesday, March 31, 2020
By Paul Martin

by Tyler Durden
Tue, 03/31/2020

Just over a week ago, when we reported on the ongoing feud between Goldman and JPM to come up with the most terrifying GDP forecast for the US, and when we asked if a Second Great Depression has begun after Goldman’s chief economist Jan Hatzius slashed his Q2 GDP forecast from -5% to -24%, we said “we expect Goldman to take the machete to this analysis as well in the coming days, because if the US economy is indeed paralyzed for at least one quarter, then all of GDP could be lost.”

We were right, because early on Monday morning Goldman’s Haztius did just that, and in a report titled “The Sudden Stop: A Deeper Trough, A Bigger Rebound”, he writes that he is “making further significant adjustments to our GDP and employment estimates. We now forecast real GDP growth of -9% in Q1 and -34% in Q2 in qoq annualized terms (vs. -6% and -24% previously) and see the unemployment rate rising to 15% by midyear (vs. 9% previously).”

Yes, the Q1 GDP drop is stunning…

… but it is the Q2 collapse which wipes out more than a third of the US economy that is truly jawdropping because as Hatzius admits, “it would represent a decline that is more than three times larger than the previous low in the history of the modern US GDP statistics.”

Detailing the assumptions behind his latest revision, Hatzius explains that he has increased his estimates of the peak hit to services consumption, manufacturing activity, and construction, “in light of new evidence on the severity of the hit across the different sectors” and now expects the level of GDP in April to be 13% below the January/February trend, as shown in Exhibit 1. “We assume that this drag then fades gradually by 10% each month in the services industry and by 12.5% in the manufacturing and construction industries.”

Behind the core of the drop Goldman sees a 19% annualized drag from services consumption on Q2 growth, on top of a 3pp drag on Q1 growth. as shown in the next chart.

Ok but why do the reputable epidemiologists at Goldman believe the pandemic will fade in coming weeks? Here’s why (and yes, warm weather makes an appearance):

While the exact timing of the medical and economic recovery is highly uncertain and relapses are plausible, our assumption is that stronger lockdown and social distancing measures and perhaps some weather effects reduce new infections sharply over the next month. Combined with potential medical breakthroughs or adaptation by firms and consumers, this slowdown in new infections is likely to lead to a gradual economic recovery. The slow pace of recovery in our forecast even in 2021 allows for longer-lasting scarring effects on businesses and workers

The Rest…HERE

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