NEW YORK-The economy recovery will be tepid throughout 2010, leading to sustained high unemployment and low interest rates in the foreseeable future, according to one analyst.
In a conference call, Goldman Sachs Asset Management VP John Olivo noted that while the economy has improved somewhat, the firm is "still bearish on the economy and interest rates in general." He described the 2009 Q4 GDP figure of 5.9% as "fairly robust," but noted that nearly two-thirds of that increase was due to temporary inventory rebuilding. Goldman is calling for GDP growth to slow to 1.5% in the second half of the year, before accelerating in 2011.
Olivo blamed a rise in savings, weak income, fiscal drag at state and local levels, and continued weakness in the housing sector for the bearish projection. The banking and investing giant also projected unemployment to peak at 10.5% sometime in 2011. Underemployment is expected to remain in the 18% to 19% range as well. "While the drift higher isn't a huge amount, we don't expect massive re-hiring in the near term and so we're calling for roughly 10% unemployment for the next two years," Olivo added.
With all of these negatives, the output gap is simply too large for inflation to take hold. Olivo noted that Goldman expects no Fed funds rate hikes in 2010 or 2011, and that the Consumer Price Index will drift slowly towards 0% by the end of next year. "It's probably the most bearish call on the street and we have seen competitors calling for tightening for as early as the third quarter of this year," he explained. "But (the Fed) has gone out of its way, specifically when they raised the discount rate, to say it's not a harbinger of policy rate increases. It's just a one-time thing." The Fed, he suggested, is holding off on raising rates unless or until it sees inflation.
