Goldman: Want to Rethink That GDP Downgrade?

By David Berman

As we mentioned in this space on Wednesday, Goldman Sachs economists blinked when they saw the reading on U.S. durable goods orders for September. They cut their estimated third quarter gross domestic product to 2.7% cent from 3% previously – and considerably lower than the consensus expectation for growth of 3.2%.

Now that the U.S. Commerce Department has reported that growth was actually 3.5% in the third quarter – according to a preliminary reading – we’re interested to hear back from Goldman Sachs. There’s no crow-eating yet, but it is interesting to see where their forecast veered from the actual result.

“GDP better than expected, due mainly to a stronger contribution from inventories than we had in our revised forecast. Final sales, at 2.5%, in line with our expectations, though the composition favored private domestic spending more than we thought.”

Meanwhile, a number of other observers remain cautious about what the better-than-expected third quarter results mean for the fourth quarter and beyond. Here’s Meny Grauman from CIBC World Markets: “But while it may appear that the good times are back for the U.S. economy, looks can be deceiving. Although we are not forecasting a double-dip recession, the stronger-than-expected jump in third quarter growth was driven by a number of temporary factors that are unlikely to provide a comparable lift in 2010."

Comments

[Tony Petroski:]

My interpretation was the Goldman was trying to create some downward momentum yesterday while at the same time "proving" that they don't have a direct pipeline to government figures.

Oct 29 01:03 PM

[pinz:]

i personally don't believe for a minute that GS would be off that much internally - I think they wanted to spook the market - of course it is impossible but would be interesting to see how they traded in advance of their report and in advance of the number release.
"buying orange juice Billy Ray!"

Oct 29 01:05 PM

[ukdaytrader:]

I would not be suprised if Goldmans had some shorts on the market prior to their announcement, and then bought in prior to closing last night.........they may want to re-think their downgrade press-release, but I bet they are laughing about next years bonuses !!

Oct 29 01:06 PM

[Mad Hedge F...:]

nndr Those of you who heeded my GLOBAL RISK ALERT on October 13(click here for report at www.madhedgefundtrader...) missed the top of the market by six trading days and 10 S&P points. I’m sorry; I’ll ring the bell more precisely next time, with a more accurate date and time. Since then, technical sell recommendations have been breaking out like acne at a junior year prom dance. You are all now out of your positions or love them so much that you are willing to carry them through another crash. At the risk of hubris, even PIMCO’s Bill Gross has jumped on the bandwagon, although I doubt he needs my help ascertaining the direction of stocks and bonds. The way everything turned tail and ran at exactly the same time was a complete vindication of my theory that a tsunami of liquidity was raising all boats, completely unjustified by the underlying fundamentals. Long time readers of this letter know the only short I have advocated this year was in long dated Treasury bonds through the TBT. But the better than expected Q3 GDP of 3.5%, obviously fueled by temporary government programs like “cash for clunkers” and the first time homebuyers tax credit, may be presenting one of those pristine, “sell on the news” moments. Will this data finally give us our long awaited double top? Fading rallies in stocks is looking more enticing by the day.

Oct 29 02:13 PM

[Tom Wolf:]

Goldman Sachs either *knew* that the actual GDP number was going to be better than their changed forecast (which would make them criminals in my eyes) or they're incompetent.

We are to believe that Goldman is full of very smart people. We know they have good information sources, thanks to their cozy relationship with the Fed. So which explanation is more likely?

Oct 29 02:55 PM

[Michael2343:]

Engineered short squeeze.

Oct 29 02:58 PM

[Russ Wetherill:]

First of all, the GDP number released today was the first estimate. The second estimate comes out November 24th, based on more complete data. Quarterly GDP is often revised downward, or upward, later in the year.

After a couple more estimates that take into account the small business sector, the final GDP number may be closer to Goldman's prediction than the number released today.

The larger question is whether anyone believes that the economy is now growing at a sustainable 3.5% annually? Please. Without the government spending programs on housing and cars we would still be seeing zero or negative growth.

Did anyone else notice that inventories declined by more than $100B again in the 3rd Quarter? How long can businesses sell down inventories to boost earnings? It's easy to grow profits when you lay off all the workers and sell only stocked items. But how long can this continue?

Oct 29 03:45 PM

[mydoghatescats:]

Why does anyone still pay any attention to the Goldmans and J.P. Morgans and others who are ALWAYS talking out of both sides of their mouth? I guess the markets are so saturated with conflicts of interest that it no longer seems to matter. It does.

Oct 29 04:11 PM

[Gary A:]

Exactly. Either they should not be trusted as a firm or they had inside information. This is such a bogus and manipulated market that it makes me sick to my stomach.


On Oct 29 02:55 PM Tom Wolf wrote:

> Goldman Sachs either *knew* that the actual GDP number was going
> to be better than their changed forecast (which would make them criminals
> in my eyes) or they're incompetent.
>
> We are to believe that Goldman is full of very smart people. We
> know they have good information sources, thanks to their cozy relationship
> with the Fed. So which explanation is more likely?

Oct 29 04:30 PM

[Liz:]

What is our GDP going to look like after you take out the (massive) government stimulus?


THAT is the $64,000 question.

Oct 29 04:36 PM

[Stone Fox C...:]

Temp factors??? So year clunkers and the housing credit boosted GDP, but can anybody really forecast that 2010 numbers will be lower then the govt boosted 2009 ones. Some estimate housing construction will need to double at least.

Doesn't that some economists get that the economy got so low that its almost impossible to get that low. Even the govt induced numbers in Q3 are scraping the bottom of the barrel. We can only go up.

Oct 29 04:37 PM

[enigmaman:]

yes agreed the Gov induced numbers in Q3 are scrapping the bottom, just imagine if they hadnt pumped trillions in the economy to get that temporary jump in GDP, today you would be looking at the markets heading for new lows, so say thank you Uncle Sam for the stay of execution, though its only temporary


Oct 29 04:37 PM Stone Fox Capital wrote:

> Temp factors??? So year clunkers and the housing credit boosted GDP,
> but can anybody really forecast that 2010 numbers will be lower then
> the govt boosted 2009 ones. Some estimate housing construction will
> need to double at least.
>
> Doesn't that some economists get that the economy got so low that
> its almost impossible to get that low. Even the govt induced numbers
> in Q3 are scraping the bottom of the barrel. We can only go up.

Oct 29 06:33 PM

[ETFdesk.com:]

some good reads on today's GDP #s,

How The Home Buyer Tax Credit Inflated The GDP Number ( www.etfdesk.com/headli... )

SNAP ANALYSIS: Will Q3 U.S. GDP be as good as it gets? ( www.etfdesk.com/headli... )

Oct 29 07:14 PM

[GMak:]

Goldman did it again!

GDP minus "Cash for Clunkers" which represent 1.7% of the 3.5% growth in 3Q. However, US brands only represent 38% or so where the rest are mostly Japanese and Korean ==> 3.5% Gov't reported (inflated) number minus 0.65% (38% of the 1.7%) ~ Goldman's 2.9% DEAD ON...

Our government borrowed the accounting software from the "too big to fail" banks; the result is sweeping portions of Japan's and Korea's 3Q GDP to its own... What FASB is that?

Oct 29 08:00 PM

[Destin:]

It would sure be interesting to know what the boys at Goldman's trading desks are up to in the hours directly before & after they make these occasional "revisions" to their forecasts. But that's just the paranoid, anti-capitalist, wealth-envying part of me talking.

Oct 29 08:52 PM

[Mary LaRue:]

This is not an isolated matter. This is common for them and other greedy analysts who attempt to insert negativity into investors' minds and shake "weak hands."
If you perform your own research and understand how the markets work, GS or any other anaylst won't be able to affect you whatsover. Take WDC, for example. And let's not leave out AMAT. These stocks there were downgraded, only to rally within the next two days.
You get into trouble when you rely upon these so-called greedy analysts (Mike at JPM and of course, GS) and follow their lead; I can say with certainty that you will lose big time by listening to their crap.

Oct 30 12:12 AM

[HouTX:]

Ha Ha look at that guy in the clown suit running off with my... wallet...

Oh, it's Goldman...

Oct 30 12:48 AM

[TKO:]

Please stop explaining that most of the GDP growth was "temporary" -- this was on purpose. The government and just about everyone knows that the "temporary" growth is not sustainable. They are not meant to be sustainable in the first place. Anyone who sees this as a conclusion that the world will not be able to recover is missing the entire point.

In Recessions, "Temporary Factors" are often required to prevent the economy from dipping farther. Without them, the economy would indeed be in a much worse position. The government acted as the spender of last resort.

The idea of a government stimulus is not to prop up the economy indefinitely. It is often used to temporarily stabilize demand for capital goods, prevent enormous capacity destruction and, most importantly, do just enough to introduce a turnaround in expectations.

The economies around the world are extremely fragile. Expectations are the greatest contributor to outlooks, and thus, spending patterns. Naturally, the first step towards any recovery is a change in expectations. That is the point of this stimulus.

Oct 30 01:02 AM

[enigmaman:]

Sorry but what you said " Naturally, the first step towards any recovery is a change in expectations.That is the point of this stimulus" is not correct,

the point of the stimulus was not to change ones expectations, it was to change the direction the economy was going by propping it up until the economy was able to run on its own.

The stimulus was supposed to cap unemployment at 8%, create and or save 3.5 million jobs, provide much needed credit to persons and business, to rebuild the nations infrastructure, it has done none of these and will do no more going forward, as per C Romer of the WH.


On Oct 30 01:02 AM TKO wrote:

> Please stop explaining that most of the GDP growth was "temporary"
> -- this was on purpose. The government and just about everyone knows
> that the "temporary" growth is not sustainable. They are not meant
> to be sustainable in the first place. Anyone who sees this as a conclusion
> that the world will not be able to recover is missing the entire
> point.
>
> In Recessions, "Temporary Factors" are often required to prevent
> the economy from dipping farther. Without them, the economy would
> indeed be in a much worse position. The government acted as the spender
> of last resort.
>
> The idea of a government stimulus is not to prop up the economy indefinitely.
> It is often used to temporarily stabilize demand for capital goods,
> prevent enormous capacity destruction and, most importantly, do just
> enough to introduce a turnaround in expectations.
>
> The economies around the world are extremely fragile. Expectations
> are the greatest contributor to outlooks, and thus, spending patterns.
> Naturally, the first step towards any recovery is a change in expectations.
> That is the point of this stimulus.

Oct 30 06:59 AM