WASHINGTON (AFP) — The recession camp got bigger Wednesday as investment giant Goldman Sachs joined those arguing that an economic downturn is already here or will arrive soon.
"The recent data suggest that the US 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.
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 percent to 2.5 percent by late 2008.
The firm cut its 2008 US growth forecast to 0.8 percent from 1.8 percent, 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 Monday, Merrill economist David Rosenberg said a report showing only 18,000 US jobs were created in December and a jump in unemployment to 5.0 percent 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 5.0 percent in December versus the March 2007 trough of 4.4 percent," Rosenberg said.
Recession "isn't even a forecast any more but is a present-day reality," and that is reflected in ultra-low bond yields and a near-bear market in stocks, he said.
The US economy expanded at a 4.9 percent pace in the 2007 third quarter but many see a sharp slowdown or negative figure for the fourth quarter or early 2008.
Morgan Stanley economist Richard Berner, who had already predicted a downturn, now maintains that "the key question now is how deep the recession will be and how long it will last."
He predicted the slump "will be comparatively mild and short; after all, recessions abroad are unlikely, so global growth will still be a prop; US excesses are modest away from housing, and peaking inflation should give the Fed latitude to ease monetary policy further."
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 says recession risks should not be confused with a downturn itself.
"We think we have a 35 percent 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."
Deutsche Bank chief US economist Joseph LaVorgna said some are placing too much emphasis on a single report on December employment, which might end up being revised, other data show a better situation.
"Based on the current growth rate in tax receipts, the economy is not in recession," he said in a research note.
"Continued gains in the six to seven percent range should be enough to sustain reasonably respectable consumer spending, and if consumer spending holds up, then so too should the economy."
Societe Generale economist Stephen Gallagher said his analysis shows just a 14 percent chance that the US is already in recession.
"Corporate profits, in fact, are the key variables that imply very low recession odds," he said.
"This week commences the quarterly earnings release season, which will eventually be the basis for updating our forward-looking model."
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."
Meanwhile St. Louis Federal Reserve Bank President William Poole said in a speech that it is "too early to tell right now" whether a recession is near.
Poole said "2008 looks to be a year of rising growth," with most forecasters calling for "slow expansion in the first half of the year and a quickening pace in the second half."
The United Nations said in an annual forecast released Wednesday that "the major uncertainty for 2008 now emanates from the US economy," and that a US slowdown "will hit many of the poor nations hard, as it will slow world trade and put an end to the boom in commodity prices that benefited them over the past years."
Copyright © 2009 AFP. All rights reserved. More »
