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Merrill Lynch's unfortunately timed upgrade on U.S. economic outlook


Guest blog from Economics Editor Peter Coy

Ouch. Merrill Lynch didn’t pick the best time to upgrade its outlook for the U.S. economy. The research note on the upgrade hit my email inbox at 8:12 a.m.—minutes before the Labor Dept. announced a worse-than-expected decline of 467,000 jobs in June.

To be fair, Merrill wasn’t completely taken by surprise. It had been expecting a loss of 375,000 jobs, which was slightly above the Street consensus, and it was looking for a jobless rate of 9.6%, higher than the actual rate of 9.5%. So it’s more a matter of appearances than reality.

The more important question is whether Merrill’s new call will prove correct. It said it expects GDP to grow at an annual rate of 2.6% in the third quarter and 2.8% in the fourth quarter, for a second-half average of 2.7%, up dramatically from its previous forecast of 1.4% growth. It attributed the upgrade to stimulus-boosted consumer spending; an upturn in homebuilding; improvement in net exports from stronger growth overseas; and a decrease in inventory draw-downs.

Interestingly, Merrill’s U.S. economics team has gotten more bullish since the departure of David Rosenberg, who moved to Toronto earlier this year to serve as chief economist and strategist at wealth manager Gluskin Sheff & Associates. Rosenberg remains an irascible bear in his new position.

I sent an email to Merrill asking about the timing of the upgrade and got this eminently reasonable response from U.S. Economist Drew Matus (my questions in italics):

1. Does this jobs report cause you to lower your newly upgraded forecast for the U.S. economy?

No, it does not. Our new forecast includes the unemployment rate moving up to 10.5% at its peak. Any one month’s worth of job losses which have a standard error of more than 100,000 and missed our estimate by less than that amount is not cause for regret or rethinking of a well thought out forecast.2. Are you wishing you had waited a day to issue your new forecast, until after you had the jobs data?

No. Our consumer spending outlook is weak and our unemployment rate forecast is for a continued rise in unemployment. The near term outlook is driven by consumption related to stimulus which is still occurring; inventory adjustments which have not been impact by this data; housing, which is unrelated; and net trade.


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