Goldman Sachs Now Confident & Bullish on the American Economy

Goldman Sachs Now Confident & Bullish on the American Economy

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goldman-sachs-logo Goldman Sachs is a name we all know, well those of us who follow international investment of any kind for any reason. At a time when banks were the salem witches for their part in the collapse of the American economy, Goldman Sachs was Melinda Warren. While the fires are only hot coals now it will likely be a long time before we forget the stories of executives taking hundreds of thousand dollars in golden parachute payments as their banks imploded.

The feelings of the public aside, on Wall Street Goldman Sachs never lost its status. Even as other banks were completely drowned by the crisis, Goldman Sach’s seemed to have the British stiff upper lip and with cut-to-the-bone analysis the firm was one of the fastest banks to start profiting from the new realities left in the wake of the crisis.

So, when Sachs remained bearish against its peers, including Morgan Stanley, it was sobering for investors, many of whom gave equal weight to their predictions as the consensus of opinion against them. We all saw the difference in stances of Morgan Stanley’s chief economist Richard Berner and his opposite number at Sachs Jan Hatzius over the summer. As Hatzius warned of the potential for a spiral of deflation exacerbated by a sluggish recovery, Berner predicted a strong rebound.

The latest round of strong economic data has seen the firm say enough is enough though. In a note to clients on Wednesday, the firm increased its GDP growth targets from 2% to 2.7% in 2011 and to 3.6% the following year.

Goldman has long argued that the recovery would be hampered by weak demand while households concentrated on paying down debt. A view shared by bond giant Pimco, who called it the “new normal”.

According to the Sach’s note, it has held this belief for five years, but now it is saying that “underlying demand is now accelerating sharply” and heading for 5% growth in the final quarter.

The note said: “This outlook represents a fundamental shift in the thinking that has governed our forecast for at least the last five years,” Goldman economists wrote. “Five years ago, we became very pessimistic about the U.S. economic outlook.”

But “recent data reveal a firmer trend in domestic final demand and suggest that it will be sustained via improvements in net hiring and credit availability,” Goldman says. Accommodative policy by the Federal Reserve along with mounting chances that tax cuts will be extended should add to the tailwind, the firm notes.

While Goldman still predicts that record unemployment of 8.5% will remain until 2013, and warns that the housing market could still derail any recovery, it is now left — contrary to trend — to play catch up with Morgan Stanley.

All the while the latter becoming even more bullish; having raised its fourth quarter GDP growth prediction from 2.5% to 3.% in November, Morgan Stanley now believes that as many as 240,000 jobs were added to the economy in October, many more than the 151,000 reported and already way more than predicted by Wall Street.