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Wednesday, January 09, 2008

More on Goldman Recession Call

by Calculated Risk on 1/09/2008 06:42:00 PM

This morning I excerpted from the WSJ: Goldman Sees Recession This Year. The WSJ quoted Goldman Sachs as believing the "latest data suggest that recession has now arrived, or will very shortly":

Here is the current Goldman GDP forecast by quarter:

QuarterChange Real GDP
Q4 20071.5%
Q1 20080.0%
Q2 2008-1.0%
Q3 2008-1.0%
Q4 20080.5%

Note that they see Q4 2007 as positive. Growth appeared solid in October and November (see Professor Hamilton's calculation of the two month PCE estimate), but there is a good chance the recession started in December. The NBER dates recessions to the month.

Goldman also sees "a significant decline in profit growth" in 2008 and significant declines in house prices with "an ultimate peak-to-trough decline of 20%-25%". This decline in house prices would mean the value of existing household real estate, as reported by the Fed Flow of Funds report, would decline by $4 Trillion to $5 Trillion (yes, Trillion and I think that deserves a capital "T").

This also implies that households with mortgages would have very little remaining equity to withdraw in the aggregate (maybe about 20% remaining equity in the aggregate with a 20% price decline, and about 15% remaining with a 25% price decline). For a calculation of remaining equity vs. price decline, see: How Much Cash is Left in the Home ATM?

With tighter lending standards, 20% remaining equity probably spells the end of the Home ATM (far less mortgage equity withdrawal or MEW). This excludes the 31.8% or so of households with no mortgage debt, since it is unlikely that households with no mortgage debt will start borrowing en masse.

Finally note that Goldman sees the duration or the recession as less than one year, and therefore not as a severe recession. I tend to agree, but I think the recovery will be sluggish too, especially for employment growth following the recession, so it will probably feel like the recession is lingering into 2009.