Goldman Sachs downgrades Obamanomics

Yes, that Goldman Sachs, the investment firm with lots of political ties, but generally more friendly to Democrats than Republicans.  In 2008, the firm bet heavily on Barack Obama, with almost a million dollars in contributions from its PAC — the second-highest contributing organization, only trailing the University of California’s PAC.  One of its former employees, Rahm Emanuel, ran the West Wing for Obama until leaving for the Chicago mayoral race late last year.

Suddenly, however, Goldman Sachs has become disenchanted with Obamanomics.  In a message sent out last night, the firm downgraded its economic forecasts across the board and warned that unemployment wouldn’t budge much over the next eighteen months, as James Pethokoukis reports:

Following another week of weak economic data, we have cut our estimates for real GDP growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from 2% and 3.25%. Our forecasts for Q4 and 2012 are under review, but even excluding any further changes we now expect the unemployment rate to come down only modestly to 8¾% at the end of 2012.

The main reason for the downgrade is that the high-frequency information on overall economic activity has continued to fall substantially short of our expectations. … Some of this weakness is undoubtedly related to the disruptions to the supply chain—specifically in the auto sector—following the East Japan earthquake. By our estimates, this disruption has subtracted around ½ percentage point from second-quarter GDP growth. We expect this hit to reverse fully in the next couple of months, and this could add ½ point to third-quarter GDP growth. Moreover, some of the hit from higher energy costs is probably also temporary, as crude prices are down on net over the past three months. But the slowdown of recent months goes well beyond what can be explained with these temporary effects. … final demand growth has slowed to a pace that is typically only seen in recessions. .. Moreover, if the economy returns to recession—not our forecast, but clearly a possibility given the recent numbers …

However, crude prices have come back up a bit recently, and prices at the pump have risen right along with them.  Pump prices are now up seven cents a gallon over the last two weeks. Consumer spending has not picked up in the latest economic indicators, and manufacturing looks ready to slide further.

Pethokoukis says alarm bells should be going off at the White House:

Unemployment on Election Day about where it is right now? Sputtering — if not stalling — economic growth? To many Americans that would sound like the car is back in the ditch — if it was ever out. Maybe Goldman is wrong, but economists across Wall Street have been growing more bearish.

And recall that back in August of 2009, the White House — after having a half year to view the economy and its $800 billion stimulus response — made an astoundingly optimistic forecast. Starting in 2011, with Obamanomics fully in gear and the recession over, growth would take off. GDP would rise 4.3 percent in 2011, followed by … 4.3 percent growth in 2012 and 2013, too!  And 2014? Another year of 4.0 percent growth. Off to the races, America.

Even in its forecast earlier this year, Team Obama said it was looking for 3.5 percent GDP growth in 2012, followed by 4.4 percent in 2013,  4.3 percent in 2014.

We’re certainly not going to see 4.3% growth in 2011; we’ll be lucky to get to 2% at this pace, and the same is true for 2012, barring a sudden conversion to supply-side economics at the White House.  That has an enormous impact on the budget debate, too.  The administration’s predictions of revenue are based on that Pollyannish forecast Pethokoukis mentions, along with significant drops in joblessness.  If that growth is halved or worse, revenues will fall far short of expectations and the budget imbalance will grow even worse.

Obama and his re-election team had better buckle their belts, because 2012 will be a very bumpy ride — for them, and for all of us.