A summary of Goldman’s 3 biggest downside AND upside risks to economic growth:
3 Tailwinds could push GDP higher than forecast – GS feels these are unlikely
Tailwind 1: Companies rehire aggressively because layoffs were too extreme in 2008. BUT…Changes in nonfarm payrolls have traced changes in GDP proportionally well during the decline and rebound of the economy.
Tailwind 2: Job growth drives stronger-than-expected consumer spending. BUT…Job growth typically lags consumption.
Tailwind 3: Capital expenditures increase above their current lows. BUT…While capex as a % of GDP is at historical lows, the current gap between GDP and potential GDP suggests that capex/GDP should be at current lows.
3 Headwinds could threaten to drag GDP lower than forecast
Headwind 1: Fiscal policy goes from strongly expansionary to mildly restrictive, which could happen if the Bush tax cuts for the middle class are not extended.
Headwind 2: Housing overhang is still huge. Residential vacancies are around 5% of housing stock vs a historical average of 3.5% during 1985-2000. Housing prices are edging down again since the expiration of the home-buyers tax credit.
Headwind 3: European crises would affect GDP through1) exports to Europe and exports to countries that trade with Europe, 2) wealth effect from declining European equities, and 3) credit availability. Offsetting those effects would be lower oil prices and lower long-term, risk-free yields if Europe’s troubles worsened.