The Lowdown on the Slowdown

- "Real GDP growth appears to have dropped below its 2½%-3% long-term potential range last quarter, judging from the latest data on retail sales and foreign trade. We have cut our estimate for second-quarter growth from 3% to 2% (annual rate)."
- "This slowdown is occurring just ahead of the loss of growth support from fiscal stimulus and the inventory cycle that we have been anticipating would occur at midyear. With the various headwinds to private-sector growth (excess vacant housing, state and local budget stresses, lack of lending, reluctance to hire) still firmly in place, we reaffirm our view that real GDP will grow at only a 1½% rate during the second half of 2010, and we worry that eacceleration in 2011 will not occur as now projected."
- "Despite these growing downside risks, US authorities do not exhibit much urgency to apply more policy stimulus. For example, the FOMC made only brief reference to this possibility in he minutes of its June 22-23 meeting and that was heavily qualified. The data have been lmost uniformly weaker than expected since then. This may prompt Chairman Bernanke to express more concern at next week’s monetary policy hearings, though all indications are that stimulus is not being actively considered."
- "What could the FOMC do given that the funds rate is already at the zero bound? The most likely option is to resume asset purchases in some fashion. Treasuries would be more effective than MBS in lowering real longer-term interest rates, but Fed officials may resist in fear of charges of monetization. Raising the inflation objective is even more unlikely, though it could be quite effective."
- "For its part, Congress can and should extend unemployment benefits, provide more aid to state and local governments, and extend some of the tax cuts due to expire at yearend."
GoldmanSachs US Economics Analyst 20100716

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