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

Posted by: Peter Coy on July 02

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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Reader Comments

BusinessWeek Economics Editor Peter Coy

July 2, 2009 03:05 PM

Just in ... David Rosenberg's latest bearish blast.

Today's employment report had deflation thumbprints all over it. And you don't have to take my word for it – have a read of San Francisco Fed President Janet Yellen's speech on June 30th when she dared to utter the "D" word. And that was before today's payroll release which contained disturbing signs of weakness on many fronts. ...


July 2, 2009 03:39 PM

Here is further proof we just dont need i**** ANALysts forecasting anything for us. Why is ML in business again? People should kick their analysts/advisor/etc to the curb and instead rely on self knowledge or a close friend who is savvy. We dont need these vampires called bankers


July 2, 2009 04:10 PM

Funny how many people want to Blame the big bad naughty banks.

There only mistake was giving people credit that didn't understand how to budget = most americans.

Are you in major credit card debt? Did you charge more than you can pay? Did you decide to leverage your earnings rather than work on being debt free?

Whose fault is it? The vampire bankers

Damian Palmares

July 2, 2009 04:52 PM

Mirror, you are exactly right. There was definitely some greedy bankers but it's funny how people automatically look to blame someone else rather than accept the fact that maybe THEY were the ones who got themselves in this predicament. Since 2/3 of our GDP was reliant upon consumer spending, once so many people were so over extended or over leveraged, it's a no brainer as to why our economy is in the tank right now.

Damian Palmares

July 2, 2009 04:55 PM

Damian Palmares

July 2, 2009 05:06 PM

Mirror, you are exactly right. Of course there were some greedy bankers but I find it funny that a lot of people were over-leveraged or over extended and they look to blame anyone other than themselves. Blame it on the bankers or blame it on the government, anything but their bad budgeting skills. Since 2/3 of our GDP was reliant upon consumer consumption, it's a no-brainer that our economy is in the tank right now.


July 3, 2009 02:15 AM

Damian et al,

Having been a Merrill client for many years, I can tell that Rosenberg was one of the few worth paying attention to.

I keep a file of their more hilarious forecasts as proof that paying for financial advice is a waste. No substitute for your own judgment.


July 3, 2009 07:47 PM

It sometimes seems to me that economists just don't get it. Any recession is about jobs, real people living real lives. A "jobless recovery" is not a recovery at all, more like an accelerated fleecing of a nation by the unelected financocracy.

I remember commenting last year that governments everywhere should be focussing on dealing with the inevitable human tragedy of unemployment. The US government has failed. It is in the process of destroying itself trying to save a financial model that is fundamentally flawed. It is not doing this not out of malice, but out of blindness and ignorance combined with a sense of entitlement from those it has called upon to help. Those who have benefitted most from the flawed model are in charge and to save the country they would need to acknowledge the fundamental flaws in what has made them successful.

I watched a documentary on Madoff recently and the most telling statement was made by one of the "financial advisors" who channelled money into the Madoff fund. He said that he had asked his wife why they were making so much money for so little effort - their conclusion: "God must have wanted them to be wealthy".

This seems to be the fundamental attitude of the financocracy. They are wealthy because they are favoured by God - therefore what they are doing cannot be wrong.

Of course it is never too late to start fixing things. Form a think tank of bright people with no linkage to the exisiting system (physical scientists, philosophers, psychologists, socialogists etc). Give them the unlimited access to the evidence and start to harvest their conclusions.

In the mean time the focus has to be on unemployment. Creating caring resilient communities. School programs to combat prejudice against the new tide of poor. Increased support for charitable organisations. Focus on community facilities (especially educational). Support for business startups. The list of possible actions is endless, the only question is whether there will be any resources left.


July 3, 2009 08:47 PM

Mirror and Damien,
First of all a confession. I'm Australian so my personal experience is going to be a bit different. Nevertheless, I've read enough to suggest that what I've seen and experienced has been pretty common across the Anglosphere.

I think it was one of the big banking executive who said "while the music plays you have to dance". This extends right down to the poorest.
If you are renting and watching home prices rise at 10 - 15 percent per annum then you'd be silly not to take out a loan and try and get into the market. If your bank manager takes your details and says "yes" then you will probably back their profssional judgement.
I have personal experience with "financial advisors" cold canvassing, spruiking "line-of-credit" loans talking about tax benefits etc (btw I suspect I would have done pretty well if I'd taken their advice).
The whole term "wealth creation" seems to have been coined by the finance industry to take the place of "getting rich by borrowing money and investing".
Certainly common sense would suggest that this is a ponzi scheme, but in ten years I've seen a lot of "wealth creation" and a consequent rise in asset prices that meant if you weren't dancing you were going backwards.
Don't blame the victims. These systems were designed by the financocracy with the specific aim of making themselves rich. They should be on the hook for it and they, just as much as Madoff, should be going down.


July 4, 2009 02:28 PM

Merrill may be right, but combine bad jobs data with the June 30th announcement that China will end commodity stockpiling.

It feels like someone just took away the punchbowl...again.

Retest of the lows?


July 5, 2009 07:48 AM

Does anybody realize our GDP has dropped
400 billion since its peak...DO you know
what the stimulus package from October 2009 to September 2010 is ???? 400 billion....Beware of rear view economic forecasts....I wouldn't want to bet against 400 bill of stimulus....


July 6, 2009 09:53 AM

I would suggest this crowd learn the difference between leading and lagging indicators in an economy, then overlay the s&p cycles over the US economic cycles and see how that stacks up. Now work the probabilities of a decision. Try not to use headlines bullet points as all inclusive directional decision tools.


July 6, 2009 06:08 PM


I think I'd suggest a widespread view that wealth can be created by borrowing money to invest would be a sound leading indicator of economic disaster.

Another leading indicator might be excessive profit growth (indicating a break in the link between labour and reward).

The relationship between S&P and unemployment may well exist, however it does not imply that government effort should be focussed on propping up the S&P.


July 6, 2009 06:47 PM

all that "human capital" wasted.. so much misery in the US right now. And you still have CEOS like Steve Ballmer promoting more globalisation as the cure for all our ills... how many sociopaths have we allowed to run our companies.. no regard for anyone else's lives than their own..


July 21, 2009 05:07 PM

err... Why should we care about what Merrill Lynch says ?

Rule one:
Don't take financial advice from people who can't handle their own finances.

Thank you for your interest. This blog is no longer active.



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