August 16, 2007
* Our GS Financial Conditions Index (GSFCI) has tightened by roughly 60 basis points over the past month. The recent tightening was the primary reason we shaved our forecasts for GDP growth last Friday.
* The tightening in the GSFCI almost certainly understates the move in financial conditions for two reasons: 1) the biggest re-pricings have occurred in areas not measured by the GSFCI, particularly non- conforming mortgage spreads, 2) in some cases, credit has become temporarily unavailable at any price.
* At this point, the move in the GSFCI is much smaller than the tightening associated with the 1987 stock market crash (344 basis points at the extremes) and still a bit smaller than the 1998 LTCM crisis (99 basis points). But the risks to growth clearly are to the downside and increasing.