Economic Outlook from our Friends at Goldman Sachs & Co.

Recovery

Near-term inventory and stimulus-led growth should remain brisk, especially after last week’s data on trade, inventories, and retail sales. In the longer term, headwinds persist in the form of labor weakness, stagnant incomes, higher savings, state and local fiscal drag, housing supply, unused industrial capacity, and limited credit demand/availability.

Unemployment

The “jobless recovery” pattern established following the last two recessions provides a reasonable template for corporate hiring decisions over the next few years. We expect the unemployment rate to peak at approximately 10¾% in early 2011.

We have raised our 4Q09 GDP estimate to a 4.0% annual rate. As we look ahead into 2010, recovery is apt to be anemic at 2.1%, but reaccelerate in late 2011 as rising asset prices, improved credit availability, and better hiring facilitate a pickup in real GDP.

Inflation

Although highly expansionary fiscal and monetary policies have caused many to worry about inflation, we believe that the large gap between potential and actual output will tame prices for at least the next few years.

Fed Policy

We remain far from consensus in our view that the FOMC will maintain a 0-¼% federal funds range in 2010 and probably 2011. There are three key reasons for this view: 1) the state of labor, inflation, and fading stimulus suggests Fed policy still remains too tight…even at effectively 0%, 2) it is better to be late than early with policy tightening as it’s much easier to intercept inflation than to defeat deflation, and 3) the Fed’s exit strategy will likely start with a reduction in quantitative easing rather t easing, than a hike in the federal funds rate.

Research - Risks to Our View

We see two plausible risks to our forecast: 1) much stronger and sustained growth above 4.0% that would lower unemployment quickly, and 2) a big run-up in asset prices that could ignite a bubble response from the Federal Reserve.