Why Contrarian Goldman Sees an Economic Rebound

Despite widespread worries that the U.S. will experience declining economic growth in 2020, and perhaps slip into a recession, Goldman Sachs predicts a rebound. "Our economists forecast U.S. real GDP growth will accelerate beyond 2%, reaching a pace of 2.3% in early 2020. Their estimate for full-year average annual GDP growth is 2.1%, above the consensus growth rate of 1.8%," according to Goldman's current U.S. Weekly Kickstart report.

Other informed observers offer a contrasting view. For example, U.S. corporate CEOs are less confident than at any prior time since the global financial crisis of 2008, while 67% of CFOs at large U.S. companies expect a recession by the end of 2020, per previous reports.

Key Takeaways

  • Goldman Sachs expects U.S. economic growth to rebound in 2020.
  • Their forecast is more optimistic than the consensus.
  • Morgan Stanley sees a global rebound in 2020, but an uneven one.
  • They find stock valuations to be high versus economic fundamentals.

Significance for Investors

Among the components of GDP, Goldman forecasts that residential and business fixed Investment will see the biggest growth. Additionally, they predict that 4 key forces will drive an uptick in U.S. economic growth:

(1) The stimulative impact of interest rate cuts by the Federal Reserve will continue to flow through the economy in the next few quarters. In particular, their economists find that easing financial conditions historically take about 3 full quarters to reach their peak effect on GDP.

(2) Tariffs, and their negative economic impacts, appear to have peaked. Their base case is that U.S. tariffs on imports from China will be unchanged in 2020.

(3) Inventory-to-sales ratios have been declining, suggesting a manufacturing rebound ahead, as companies increase production to meet demand and rebuild inventories. In particular, the proportion of small businesses planning to increase inventories reached its highest level of the year in October.

(4) Negative impacts of "Idiosyncratic events" such as the General Motors strike and falling oil prices should subside in 2020. Goldman expects that resolution of the strike will spark a rebound in automobile production, and in payroll growth. Meanwhile, the negative impact of lower oil prices on the energy industry should be more than offset by the positive impact of lower costs on other industries and consumers, especially as prices stabilize.

Right now, Goldman cites several positive indicators for the U.S. economy. Non-farm payrolls increased by 128,000 in October, sending the recent trend up to 175,000. Home sales were up by 5% year-over-year in September and October. After dropping for 6 straight months, the ISM Manufacturing Index rose moderately in October, while the ISM Non-Manufacturing index also increased. On Friday, the core retail sales also showed an increase.

Looking Ahead

Morgan Stanley is a leading Wall Street firm with a more pessimistic view. They expect earnings estimates for the S&P 500 during the next 12 months to be revised downward, per a recent issue of the Weekly Warm-Up report from their U.S. equity strategy team headed by Mike Wilson. "We expect to see weak [economic] growth in 2020," they write.

In another report, the 2020 Global Strategy Outlook, Morgan Stanley's economists expect global economic growth to improve starting in Q1 2020, but that it will be "uneven." Moreover, they find that stock market valuations are still high versus previous points in history when the Purchasing Managers' Index (PMI) began to emerge from a trough. They also write that "US risk assets are too expensive for the modest [economic] pick-up we forecast."

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