Jan Hatzius, Goldman Sachs' (GS) Chief U.S. Economist, gave upbeat comments about economic growth in an interview on Bloomberg Television. Last month, Hatzius predicted the U.S. economy will grow by 3.4% in 2011.
Now he's upgraded that prediction a notch to 3.5-4%. "It's a reasonably upbeat view," says Hatzius about his comment regarding growth predictions for the next two years. “It’s certainly a reminder that there are still some significant risks in the global economy, and of course especially to the extent that it affects oil prices and commodity prices more generally. Having said that, our outlook for global growth and the U.S. economy is pretty positive. We think close to 5% GDP growth this year and next year in the global economy and sort of 3.5-4% over the next two years in the U.S."
Just a month ago Goldman was predicting inflation to be 0.5% in 2011 and 2012. Now, without mentioning any numbers, Hatzius is getting slightly bearish about the headline inflation. When asked about the food price inflation, this is what he said:
It is certainly on our radar. It is not yet fully in the inflation data here; that's still going to happen over the next few months. We will see upward pressure on the headline CPI numbers as the food price inflation shock feeds through. At the margin, that is going to be a drag on household budgets. Having said that, there are also a number of more positive factors pointing in the other direction and that improve household budgets, the improvements in the labor markets probably the most important of them. It is a potential negative, but I think it is being outweighed by other forces.
Goldman is also getting more bullish about consumer spending and retail stocks. "I think the first quarter looks a lot softer than a fourth. The number now on record for the fourth quarter is 4.4% ... I think it will come down a bit in the wake of the downwards revisions to the retail sales report. I think the first quarter will be softer. Over the next year or so, I would expect something like 3.5% consumer spending growth, definitely better than what you have seen for the last few years, though not as strong as the recent spurt," says Hatzius, predicting consumer spending growth.
A month ago, Goldman was expecting the unemployment rate to drop to 8.75% by the end of 2012. Now, Hatzius is pronouncing 8% for 2012 unemployment. Bullish predictions about retail sales, unemployment and GDP growth rates lead Goldman to make bullish predictions about the stock market.
"It is not super-strong relative to the downturn we saw, but it is clearly better than we have had in the past few years. A low inflation, low rate environment, policymakers staying on the sidelines and letting that return to higher levels of employment happen for while -- I think that's a fairly positive environment and the way our strategists translate it is to S&P 1500 by the end of the year," said Hatzius.
The most straightforward way of playing Goldman’s bullish predictions is going long SPDR Dow Jones Industrial Average ETF (DIA), PowerShares QQQ Trust ETF (QQQQ), or SPDR S&P 500 Trust ETF (SPY). However, Goldman is getting more bullish about the unemployment rate and consumer spending. As households find jobs and their incomes rise, consumer spending will rise and retail stocks such as SPDR S&P Retail (XRT), iShares Dow Jones U.S. Consumer Index Fund (IYC), Vanguard Consumer Discretionary ETF (VCR), and PowerShares Dynamic Retail Portfolio (PMR) will increase more than the market does.
Investors with a higher risk appetite may also consider leveraged retail ETFs like ProShares Ultra Consumer Goods ETF (UGE) and ProShares Ultra Consumer Services ETF (UCC). Considering Goldman’s global growth prediction is one percentage point higher, MSCI Emerging Markets ETF (EEM), PowerShares DWA Emerging Markets Technical Leaders Portfolio ETF (PIE) or iShares‘ Global Consumer Discretionary Sector Index Fund (RXI) might be a better choice.
We are concerned about inflation and interest rates. We believe corporate earnings will keep growing and the stock market will head higher, but rising inflation and higher growth rates will push interest rates higher. As a result, we are bearish about bonds and bond ETFs such as SHY, IEF, TLT, and TIP. Warren Buffett also publicly expressed his views about the direction of interest rates about three months ago. “I think short-term and long-term bonds are a very poor investment at the present time,” Buffett said in November. Last month, Berkshire Hathaway (BRK.B) acted on that prediction and sold $1.5 Billion of mostly fixed-rate debt to retire floating rate notes.
Disclosure: I am long SPY, TBT.