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Sunday, November 13, 2011

Downside Risks

by Calculated Risk on 11/13/2011 12:47:00 PM

On Friday, Goldman Sachs economists expressed concerns about two potential negative shocks for the U.S. economy:

"We are particularly concerned about two potential negative shocks— one of which has already materialized to some degree. First, a worsening of the European financial crisis would hurt the economic outlook globally. Second, our forecast assumes that the payroll tax cut is extended for another year; if that failed to happen, the fiscal drag in early 2012 would rise significantly."
Goldman Sachs, November 11, 2011

These are downside risks to Goldman's forecast of about 1% GDP growth in the first half of 2012 - already a very weak forecast!

On the second point, additional fiscal stimulus might depend on the so-called "super committee" that has a November 23rd deadline. I have little confidence in the committee. Here is an update from the WaPo: Supercommittee hasn’t ‘given up hope,’ Hensarling says
“We haven’t given up hope,” Rep. Jeb Hensarling (R-Texas) said on CNN’s “State of the Union.” “But if this was easy, the president of the United States and the speaker of the House would have gotten it done themselves.”
It is hard to believe that Congress would raise taxes on working Americans with a 9% unemployment rate, and in an election year - but that just might happen ...

I agree that the European financial crisis and additional fiscal tightening are the two major downside risks, but I think there are several other risks worth mentioning.

Oil and gasoline prices have remained fairly high and there is always the risk of another supply shock in the middle east. Gasoline prices are already at the highest level ever for October and November. Not a great way to start the holiday shopping season.

Another ongoing drag has been state and local government cutbacks. This year, state and local governments have cut 232,000 payroll jobs (about 23 thousand per month). This might continue in 2012 (most forecasts are for cutbacks to slow next year). The California State controller recently reported:
State Controller John Chiang today released his monthly report covering California's cash balance, receipts and disbursements in October, showing revenues came in $810.5 million below projections from the recently passed state budget.

"October's poor revenues capped a very disappointing first four months of the fiscal year," said Chiang. "Unless revenues and expenditures begin to track with projections, the State will face increasing cash pressure in the months ahead."
This shortfall could lead to additional cuts in California next year, and other states are probably falling short too.

And last, but never least, the U.S. housing crisis is ongoing. House prices are now falling again, and there will be more distressed supply coming on the market - especially once the mortgage settlement is reached. It does appear the excess supply is being absorbed (based on falling vacancy rates), but there is still a long way to go.

My general forecast is for sluggish growth, but there are some significant downside risks.

Schedule for Week of Nov 13th
Summary for Week Ending Nov 11th