Peculiar prediction

Gosh, we're more than halfway through January and predictions for the new year are still pouring forth.  One of the strangest is from David Kostin of Goldman Sachs, who predicts a dramatic housing slump…but no recession.

Reports Ambrose Evans-Pritchard in the London Telegraph:

The US Federal Reserve will need to slash interest rates three times this year as the housing slump goes from bad to worse and the American consumer begins to buckle, Goldman Sachs has warned.

"Americans have shown a complete lack of self-control. The personal savings rate is at its lowest point ever, and has actually been negative since April 2005.

"We believe that housing will soon become the proverbial 'straw that breaks the camel's back'," said David Kostin, the investment bank's US strategist.

Goldman Sachs said homeowners had treated windfall gains from rising house prices as if they were "recurring income", using home equity withdrawls to subsidize over-stretched lifestyles. This artificial boost to spending has already dropped from 7pc to 4pc of GDP over the last year, and is likely to halve again in 2007.

Mortgage equity withdrawal will fall from 13pc of "discretionary household cash flow" in 2006 to 7pc this year, causing spending power to contract for the first time since the dotcom bust.

A grim prediction.  But in the very next graf, we read this:

The bank predicted in its closely-watched global outlook that the US would stave off recession, notching up growth of 2.1pc in 2007. Interest rates will fall briskly from 5.25pc to 4.5pc by the end of the year.

Now I'm sure Goldman has a plausible, if not necessarily logical, explanation for this disconnect.  But Pritchard doesn't tell us what it is.

Of course, Goldman is no doubt talking about the government's phony-baloney GDP numbers.  The latest chart page from John Williams's Shadow Government Statistics shows that adjusted for reality, the economy is already contracting and has been for a while. 

The Daily Reckoning