Are Goldman Sachs’ Predictions Accurate?

CNBC reports that Goldman Sachs is predicting that the US has a 40% chance of entering another recession – that is two or more quarters of negative growth. Jan Hatzius, Goldman Sachs’ chief US economist, defended the prediction, saying, “Ultimately, it’s a judgment call… We’re basically indicating that we think the risk is sizable and elevated, especially given the already underway deterioration in the labor market, although it’s a gradual one.”

Citing Goldman Sachs’ estimate that the US unemployment rate is expected to jump to between 9-10 percent, Hatzius explained, “Historically, U.S. business cycles have been quite vulnerable to rising unemployment and deteriorating dynamics in the labor market.” Goldman Sachs is estimating a growth of 0.5% for the first quarter next year, after elevating its predictions for the last quarter of 2011.

Of course, Hatzius has been wrong before.

In January 2011, he was bullish about the US economy, predicting that inflation would stay around 0.5% throughout 2011 and 2012 (see his early predictions here). Inflation is currently closer to 3.8%. In contrast, fund managers like Seth Klarman were more accurate, expressing concerns about runaway inflation and a weakening US dollar (read Seth Klarman’s predictions).

Hatzius also predicted in January that interest rates would “stay at zero for another two years” while fund managers like David Einhorn, Greenlight Capital, think that interest rates will continue to rise and, as a result, are pushing more money into commodities (check out Einhorn’s outlook here). In this case Hatzius was correct but for the wrong reasons. Interest rates are lower now because of the poor GDP growth rates. Hatzius was predicting a 3.4% growth rate for 2011 and 3.8% growth rate for 2012. Now he is expecting a contraction in 2012. We don’t think Hatzius or Goldman Sachs are doing any “real work” to make predictions. They just “predict” what the markets are telling – with a couple of months’ delay.