Does Goldman Sachs Project a Repeat of the Great Recession for 2013?

Econintersect:  There have been a number of estimates of what the impact will be on the economy if the U.S. goes over the fiscal cliff at midnight 31 December 2012 and takes no corrective action in 2013.  The following table shows one summary of an estimate of drag on GDP from Matt Yglesias at Slate:

Business Insider has posted a graphic from FT Alphaville based on data from a Goldman Sachs analysis of the impact on GDP.  The Goldman analysis is the one showing the biggest impact of which Econintersect is aware.

The cumulative GDP loss for the five quarters shown above is calculated by Econintersect to be 3.8%.  The CBO has made an estimate that 3.8% would be the total GDP drag in 2013 (see below).

If the base GDP growth for 2013 is assumed to be zero then the drag represents the net GDP number for the year. 

The cumulative GDP loss for The Great Recession was 4.3%.  The Goldman estimate would make the 2013 recession about 88% as severe as the 2007-2009 recession.  Would that make it “The Not Quite Great Recession?”

Note: If the assumption is that the base without the fiscal cliff would not be zero, but say the current 1.3% GDP estimate for 2Q 2012, then the recession is much shallower in 2013 with the Goldman numbers, about -2% cumulative or a little less than half The Great Recession.

The following graph from the Center on Budget and Policy Priorities shows the quarterly GDP for the past 4 1/2 years, including the six quarters of The Great Recession.

The CBO has shown a much smaller estimate for a 2013 slowdown.  Note: This CBO graph does not reflect the latest number for 2Q 2012 GDP of 1.3% growth.  If that adjustment to 1% less than currently shown in the graph is projected forward the negative GDP level reached is between -1.5% and -2% and the amount of time below zero is lengthened. But even with that adjustment nothing comes close to the two quarters with negative GDP growth below -4% from the Goldman Sachs’ analysis.

In this case the base assumption for GDP without any fiscal cliff effects appears to be about 2% or so.  In that scenario the cumulative GDP loss for the recession would be about -1%, a very mild recession.

Note: The drag from the fiscal cliff estimated by the CPO is shown below in tabular form and is identical in cumulative effect to that shown in the Goldman Sachs graph.

Conclusion: Goldman Sachs is projecting a recession almost as severe as The Great Recession for 2013 only if their analysis (and the CBO analysis as well) is applied to a base reference that would be bordering or in recession in 2013 if there were no fiscal cliff at all.

John Lounsbury

Sources:

• Chart of the Day:  Goldman’s Quarter-by-Quarter Breakdown Of How The Fiscal Cliff Will Crush The Economy (Sam Ro, Business Insider, 19 October 2012)

• Another Fuscal Cliff Chart (Cardiff Garcia, FT Alphaville, 18 October 2012)

• JP Morgan Warns Payroll Tax Cut Expiration Could Hammer 2013 Growth (Matthew Yglesias, Slate, 19 October 2012)

• CBO Forecasts Economic Contraction in 2013 (GEI News, 22 August 2012)

• Third Estimate 2Q2012 GDP Revised Down to 1.3% (Steven Hansen and Doug Short, GEI Analysis, 27 September 2012)

• Chart Book: The Legacy of the Great Recession (Center on Budget and Policy Priorities, 10 October 2012)

• National Economic Accounts (BEA, 19 October 2012)