Five depressing thoughts from Goldman Sachs

October 6, 2010

Via the GS econ team (as excerpted and outlined by me):

1. We see two main scenarios for the economy over the next 6-9 months—a fairly bad one in which the economy grows at a 1½%-2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession.

2. There is not much probability of a significantly better outcome.  The reason is that “short-cycle” factors such as the inventory cycle and the impulse from fiscal policy are likely to continue deteriorating through early 2011, keeping GDP growth very sluggish.

3. However, the recession scenario also has significant probability (we still think about 25%-30%).

4. Relative to our baseline scenario of extension of the lower- and middle-income tax cuts, we estimate that full expiration would result in a further hit to GDP growth in early 2011 of nearly 2 percentage points (annualized).

5. Meanwhile, the slow-motion improvement in areas such as excess housing supply and bank credit quality is likely to continue.  This should add up to a gradual acceleration in growth to a trend or slightly above-trend pace by late 2011 and going into 2012.

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