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Worst Case Scenarios For 4th Quarter: They're Down Right Grim

If you think the economy feels bad, by the end of the fourth quarter it could get downright depressing based on the worst case scenarios some economists are kicking around. But hopefully, we won't see those worst cases, and anything less could be a relief.

Goldman Sachs economists did an exercise where they set some very negative forecasts against the fourth quarter to see just what worst case GDP might look like. Their current forecast is for a decline of 3.5 percent in annualized "growth," but in a "just awful" environment they get to minus 6 percent. Worst case? That would be a 7.8 percent decline.

They have not changed their own outlook, but say they have begun to wonder if there could be a bigger decline then they've predicted, they said in a note this week.

"For the pessimistic but plausible -6 percent scenario to become a reality, we would need to see some very bad numbers over the next several weeks; in some sectors of the economy, a further acceleration in the pace of decline - and/or significant downward revisions to already-reported numbers," they wrote in a note.

To get to that number, the economists said it might take a nasty combination of declines in real consumer spending of 0.5 per cent per month (the likely rate for October and consistent with retail sales declines of 2 percent or more); residential construction outlays falling 3 percent a month; nondefense capital goods shipments slumping 1.2 percent per month, and a considerable decline in government spending. There would also have to be a lack of support from trade.

Deutsche Bank chief U.S. economist Joseph LaVorgna was also crunching numbers this week and he says he came up with a worst case scenario for GDP to shrink by 8 percent in the fourth quarter after the third quarter's decline of 0.3 percent. His forecast though is for a 4.5 percent decline.

Shrinking 8 percent?
"It's definitely possible. The bulk of it is likely to be capital spending and inventories. Consumer spending will be down again," said LaVorgna. In a note, he wrote: "The primary reason we have not shifted to that extreme view, at least not as of yet, is due to a projected collapse in inflation this quarter, led by what we expect to be at least a 0.6 percent decline in October headline CPI and a roughly 4 percent decline this quarter compared to a nearly 7 percent increase last quarter."

    • Consumer Prices Take Record Drop in October

In his note, he said "the current credit shock bears some rough similarities to the imposition of credit controls in Q2 1980 when the economy shrank by 8 percent."

He said Tuesday's NAHB homebuilders sentiment index, which fell to a new low, suggests housing activity will weaken even further from current record lows. "We are even more worried about what happens beyond the current quarter, especially if the Big 3 auto makers ultimately will file for bankruptcy. If this occurs, the impact on the economy could be catastrophic."

For now, his forecast is that the first quarter declines 1 percent, but that number of course could change. "A big part of it is if you don't get the inventory drag in the fourth quarter, you get it in the first quarter," he said.

Questions? Comments? marketinsider@cnbc.com

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