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Goldman Sachs slashes forecasts, now sees GDP shrinking 39% this quarter and unemployment at 25%

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  • Goldman Sachs now thinks second-quarter GDP will decline 39%, and increased its peak unemployment rate estimate to 25% from 15%, according to a note published Tuesday evening.
  • Following the first quarter GDP and April unemployment data release, Goldman now estimates that consumer services spending fell 20% from pre-virus levels in April, adding that alternative data suggests a collapse in transportation, hotel, and entertainment spending.
  • The bank said that reopening the economy presents risks besides the potential for COVID-19 to reemerge and spread, including the risk that "prolonged economic weakness could cause severe scarring effects such as permanent layoffs and business closures that delay the recovery."
  • Goldman added that it looks like "the US economy now appears to be through the trough" of the current downturn, suggesting that the bottom in economic activity is in.
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Goldman Sachs now thinks second quarter gross domestic product will decline 39%, and increased its peak unemployment rate estimate to 25% from 15%, after accounting for first quarter GDP, April employment data, and insights from big data sources.

The bank estimates that consumer services spending dropped 20% from its pre-virus levels in April, it said in a note published Tuesday evening, and that big data sources like consumer transaction and location data imply a 80% to 95% collapse in spending in transportation, hotel, and entertainment categories. Healthcare also experienced a dip in spending.

Despite the sharp drop in spending, Goldman said the fiscal stimulus coming from Congress has substantially offset the hit to disposable income, and should help mitigate second-round effects of an economic drop that would usually be very large.

"Second-round multiplier effects would usually be very large in such a severe downturn, amplifying the first-round impact. This time, however, policymakers appear to have largely short-circuited the second-round effects," Goldman said.

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The bank now forecasts a deeper quarter-on-quarter annualized hit to economic growth, with second quarter GDP dropping 39% versus its prior 34% estimate. That will be followed by a faster recovery in the third quarter, with GDP jumping 29% versus its prior 19% estimate, Goldman said.

For year-over-year GDP growth estimates, the bank expects -12.6% in the second quarter, -7.3% in the third quarter, -5.4% in the fourth quarter, and -6.5% for 2020.

Goldman said it thinks the US economy is through the trough, essentially having bottomed in April. Alternative data from sources like Foursquare and the Google Community Mobility Index suggest consumer activity is starting to pick up.

Goldman Analyst Note Alt Data.JPG

Goldman expressed confidence that the economy should now be on an upswing from April for several reasons. First, most authorities are continuing to relax lockdown orders. Further, businesses and individuals are likely to adapt to minimize the economic costs of social distancing while keeping the virus spread under control, and improvements in treatment later this year should help reduce fear. 

There are risks to reopening, however.

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Besides the risk of a potential flare-up and second wave of COVID-19 cases, it could bring prolonged weakness in the economy that "could cause severe scarring effects to workers and businesses that delay the recovery down the road," Goldman said.

To the upside, a strong and quick recovery in economic activity in the US, similar to what has happened in China over the past few months, is possible but might be too optimistic.

"China has reduced the spread of the virus more effectively than the US and has an economy more tilted toward industrial activity, where recovery has been quicker," Goldman said. "The more top-down nature of the Chinese economy and the fact that the government has pushed hard to go back to work have also contributed to the speed of [its] recovery."

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