If you need proof that no-one on Wall Street knows what the heck is going to happen over the next few weeks, look no further than its most prominent investment bank. Goldman Sachs expects U.S. GDP to tank a historic 24% in Q2, then miraculously come back to life as the coronavirus disappears.
To put Goldman’s GDP prediction into context, it would probably be one of the worst readings ever recorded for any quarter.
It isn’t hard to see how Goldman came up with this number, as economic activity in the U.S. has been shuttered in its most economically significant areas like Texas, California and New York.
Additionally, the two main corridors of trade, the northern border with Canada and the southern border with Mexico, have been closed to all but essential travel.
The economy faces more than just the coronavirus, as a collapse in oil prices triggered by a price war between Saudi Arabia and Russia threatens America’s position as one of the world’s largest oil producers.
So, the scale of the downward revision made by Goldman’s economists (less than a week ago they forecast a -5% contraction) seems quite reasonable. The fact that they had to make such a drastic change is not.
Either Wall Street was not paying attention again, or someone was just far too optimistic. Hopefully, no clients placed too many bullish trades based on that rose-tinted initial prediction.
Here is Goldman Sachs’ justification for its initial forecast:
Over the last few days, social distancing measures have shut down normal life in much of the US. News reports point to a sudden surge in layoffs and a collapse in spending, both of which appear to be historic in size and speed. We are therefore making further large downward revisions to our economic forecast.
The spread of coronavirus has proven to be alarmingly rapid in Europe, with Italy and Spain both recording their worst death tolls on Friday, March 20. All this is creating a very testy Donald Trump at the daily coronavirus briefings.
It has not all been bad news, as China claimed that it had no new cases of COVID-19 for the first time, providing a ray of hope as North Americans and Europeans adapt to the “shelter in place” lifestyle.
Where Goldman’s forecast gets a bit odd is its prediction for Q3 and Q4. Anticipating 10% and 12% gains, respectively, the investment bank’s economists are calling for an impressive rebound in activity when coronavirus bids a hasty retreat.
Unfortunately, it doesn’t appear that science matches up to these expectations. While warm weather and lockdowns might help to slow the spread, many scientists expect COVID-19 to make a comeback in the winter.
There are some people who believe it could be gone as soon as April. Tesla boss Elon Musk tweeted it’s likely there will be any new U.S. cases in a little over a month.
There’s also an economic dynamic that contradicts such a rosy prediction.
Battered consumers might experience a sugar rush of pent-up demand, but this is likely to be blunted by the fact that so many are struggling financially. Next week’s jobless claims report is expected to show a historic number of layoffs.
If you are a Goldman executive, however, this probably isn’t going to affect you.
The more cynical market commentators believe that Treasury Secretary Stephen Mnuchin’s 20% unemployment claim to Republicans might spur them into action. In furthering this goal, they also theorize his connection with Goldman Sachs might have encouraged this drastic change to their forecast.
Either way, it’s clear that Wall Street, like the rest of us, hasn’t got a clue what’s going to happen next.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: June 24, 2020 1:03 AM UTC