Goldman Sachs: Economy needs fiscal, monetary boost

July 6, 2010

The econ team at Goldman Sachs is sounding worried. Here are a few snippets from a new report:

1.   Friday’s jobs numbers were disturbing.  At best, they show an economy that is growing only quickly enough to keep the unemployment rate flat near 10%.  At worst, they suggest that the labor market is once again turning down.

2. With inventory investment now again close to a normal rate, GDP growth is likely to converge to final demand growth, which has averaged only 1½% since mid-2009 and is unlikely to accelerate given the various headwinds facing the economy.

3. The weak labor market implies not only a great deal of hardship for workers, but also a growing risk of deflation.

4. So what is to be done?  On the monetary side, the possibilities include additional purchases of Treasuries and mortgage-backed securities, as well as TALF-like structures—i.e., special purpose vehicles that lend to nonbanks using equity provided by the Treasury and debt provided by the Fed.

5. On the fiscal side, we hope that Congress passes the extension of emergency unemployment insurance, continued aid to state and local governments, and at least a temporary extension of the bulk of the 2001/2003 tax cuts beyond the end of 2010.

6. A failure to enact additional stimulus—at a minimum, extended unemployment benefits, state fiscal assistance, and extension of the bulk of the 2001/2003 tax cuts—would imply a downside risk to our GDP and employment forecasts, specifically for 2011.

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Regretfully, Goldman’s recommendations are too little, too late — the US is headed straight into deflation and depression from this point forward…

Posted by mckibbinusa | Report as abusive