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If you have been reading Fundmastery Blog for a while, it should be no surprise to you that economic growth is slowing. Now, Goldman Sachs (NYSE:GS) has finally released a report that states the obvious. It’s really a question of how low does it go. Do we just muddle along with slow growth or do we sink into another recession? As you can imagine, the report is at odds with government growth forecasts, which are still far too high. The indispensable Zero Hedge passes along Goldman Sachs’ report [emphasis added]:

More Downgrades to Our Growth Forecasts

  • Following another week of weak economic data, we have cut our estimates for real GDP growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from 2% and 3.25%. Our forecasts for Q4 and 2012 are under review, but even excluding any further changes we now expect the unemployment rate to come down only modestly to 8¾% at the end of 2012.

Goldman is estimating unemployment at 8.75% at the end of 2012? Yikes. That will set the cat amongst the pigeons at campaign headquarters for those seeking re-election next year. Goldman Sachs continues and the news does not get any better:

  • The main reason for the downgrade is that the high-frequency information on overall economic activity has continued to fall substantially short of our expectations…
  • We have no hard information about final sales in Q3 yet, but Friday’s preliminary consumer sentiment index for July from the University of Michigan fell to the lowest level since March 2009 (!) and is now back in territory normally associated with recession

This next comment was sobering in that it pointed out that we need 2-2.5% GDP to keep the rate of unemployment from rising. More from GS:

…One key question in coming months is whether final demand recovers to the 2%-2½% pace that is probably necessary to keep GDP growth near trend and prevent the unemployment rate from rising more noticeably. Obviously, we have no hard information about Q3 in this regard yet, but Friday’s preliminary consumer sentiment index for July from the University of Michigan was highly discouraging…

…The “bugbear” is that we are still unsure about the precise reasons for the slowdown in 2011 to date, which is sharply at odds with our expectation at the end of last year that growth would accelerate in 2011...

Now that last line in bold is funny, albeit unintentionally so. Of all organizations, Goldman certainly has a handle on what has gone wrong. Goldman’s report lists a few potential reasons for the slowdown, but the real answer is that everything seems to be against an economic recovery right now.

What is holding back economic growth?

Unlike Goldman, I’m not afraid to point out the litany of factors holding back economic growth:

Deleveraging: We are in the midst of a massive deleveraging of the private sector in which consumers and businesses are cutting back on spending and reducing debt.

Slowdowns in Japan & Europe: Major economic regions such as Japan and Europe have had huge growth-sapping events– the earthquake and tsunami in Japan’s case and the economic collapse of Greece and other EU countries.

Government cutbacks: The economy is also feeling the effects of slowing spending at the state and local level.

Fed’s QE II done: Federal Reserve intervention (QE I & QE II) is now over or at least on hold.

Debt & the debt ceiling debate: There is all the uncertainty over the spike in government debt and the debt ceiling brouhaha which has not been handled well at all.

Unemployment rising & small businesses hurting: There are problems in hiring because small businesses in particular do not see growth in revenue, but they do see higher expenses and regulations ahead. Hence, no hiring because most gains in employment come from small businesses.

I’m sure the folks at Goldman Sachs know all this, but they also know they do not want to bite the hand — big government — that feeds them so well. As a result, they are easing the bad news out as quietly as possible in the hopes that no one in Washington will shoot the messenger. Good luck!

Source: Goldman Sachs Slashes Economic Forecast