The recession camp got bigger Jan. 9 as Goldman Sachs became the latest Wall Street firm to join those arguing that an economic downturn is already here or will arrive soon. "The recent data suggest that the U.S. economy is falling into recession," Goldman Sachs economists said in a research note, noting that the impact of credit and housing woes is already being felt. "We expect economic activity to contract modestly through late 2008, followed by a gradual recovery in the course of 2009."; The report came two days after Merrill Lynch said a recession was "a present-day reality" for the world's biggest economy.
Goldman Sachs said it expects the Federal Reserve to cut interest rates aggressively, bringing the federal funds rate from 4.25% to 2.5% by late 2008. The firm cut its 2008 growth forecast for the U.S to 0.8% from 1.8%, and sees gross domestic product (GDP) declining in the second and third quarters. A recession is generally defined as two consecutive quarters of declining economic output.
On Jan. 7, Merrill economist David Rosenberg said a report showing only 18,000 U.S. jobs created in December -- with a jump in unemployment to 5% -- means a recession is here. "At no time in the past 60 years has the unemployment rate risen 60 basis points from the cycle low without the economy slipping into recession, and here we now have the jobless rate hitting 5% in December versus the March 2007 trough of 4.4%," Rosenberg said.
Despite the predictions from the big Wall Street firms, a number of other analysts say a recession is not yet at hand and might not become reality. Lehman Brothers, for one, says recession risks should not be confused with a downturn itself. "We think we have a 35% chance of a recession," said Lehman economist Drew Matus. "We disagree with the forecasts of a recession being the most likely secnario. We think they are overly pessimistic. And we expect growth of 1.5% in 2008."
Goldman Sachs economists said that despite their bearish short-term view, the recession "is likely to last two to three quarters and should be relatively mild by historical standards, with a cumulative decline in real GDP of only about 0.5 percentage points." They said they remained "quite optimistic about the economy's longer-term prospects," predicting that the economy "can grow at close to a 3% trend rate without igniting inflationary pressures."
Copyright Agence France-Presse, 2008