Goldman Predictions No Better Than Coin Flip, Bank Admits

Some folks think of Goldman Sachs as a collection of the smartest guys in the room. In an Enron kind of way that’s almost indisputably true.

Others think of the firm as a kind of nefarious, shadowy global bad actor that’s played the revolving door like a fiddle and thus deserves the disparaging moniker “Government Sachs.”

Still others take a more light hearted approach and simply look at the bank’s recos as contrarian indicators distributed solely for the purpose of “muppetizing” clients.

Whatever the case, I got a pretty hearty laugh when I discovered Tuesday morning that the bank recently set out to determine how many of the answers it gave when it asked itself a bunch of questions about the outlook for 2016 ultimately turned out to be right. Consider the following excerpts from a note out Tuesday:

In our annual review of the key questions for the prior year, we revisit each question, what we predicted, and what actually happened, with a brief discussion of the reasons for any hits and misses.

1.Will growth stay above trend? Our answer: yes. Verdict: narrowly correct for 2016 as a whole, though incorrect for H1. For the year as a whole, the US economy seems to have grown at a modestly above-trend pace. Real GDP grew 1.8% for the first three quarters and an estimated 1.9% for 2016 on a Q4/Q4 basis; our current activity indicator (CAI) has also averaged 1.9% through November. These numbers are slightly above our estimate of potential GDP growth of 1¾%, though clearly below our 2.3% forecast and the 2.6% Blue Chip consensus for Q4/Q4 growth as of the end of 2015.

2.Will homebuilding remain the fastest-growing sector? Our answer: yes. Verdict: incorrect. Real residential investment actually fell 1.7% (annualized) in the first three quarters and likely stagnated for the year as a whole. Some of this weakness is related to a surprising decline in the average value of new single-family homes that does not comport with other house price indicators, but even housing starts made little headway for most of this year.

3.Will the consumer stay strong? Our answer: yes, though not as strong as in 2015. Verdict: correct. The fastest-growing sector in the economy was the consumer. Real consumer spending grew 2.9% in the first three quarters and an estimated 2.8% for the year as a whole, below the very strong pace seen for most of 2015 but at least a percentage point above trend.

4.Will capex accelerate as the energy drag fades? Our answer: yes. Verdict: incorrect. Overall, real capital spending was approximately flat in 2016, just as in 2015.

5.Will inflation rise? Our answer: yes. Verdict: correct. Core PCE inflation has risen from 1.4% year-on-year in December 2015 to 1.7% in October 2016.

6.Will the FOMC deliver more than two hikes in 2016? Our answer: yes. Verdict: incorrect. We thought that the FOMC would hike four times in 2016, compared with the two hikes that were discounted in market pricing at the end of 2015. But they hiked only once.

7.Will the market’s estimate of the terminal funds rate rise? Our answer: yes. Verdict: inconclusive. Market estimates of the terminal funds rate fell substantially for much of 2016 but have reversed this decline since September, with most of the change coming after the election.

8.Will the Fed start shrinking its balance sheet? Our answer: no. Verdict: correct. Given the more dovish rate decisions, it is hardly surprising that the Fed kept its balance sheet unchanged. We now expect the first move toward balance sheet normalization in mid-2018.

Ok, so that’s 4 correct, 3 incorrect, and 1 inconclusive.

In other words, you’d have done just as well when it comes to macro predictions by flipping a coin this year.


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