Goldman Sachs Predicts Light Recession

Discussion in 'Wall St. News' started by crgarcia, Jan 9, 2008.

  1. AP
    Goldman Predicts Light Recession
    Wednesday January 9, 12:42 pm ET
    Goldman Sachs Predicts First Recession in 6 Years, Though Expects It to Be Mild

    NEW YORK (AP) -- The biggest investment bank on Wall Street has a grim prediction about 2008: a recession is definitely on the way.

    Goldman Sachs on Wednesday said it believes the housing slump and recent credit market turmoil will spill over into the broader economy this year. And, by the time it's all over, economists believe the Federal Reserve will cut interest rates to 2.50 percent from its current 4.25 percent.

    There is a silver lining to the dire prediction, however, since Goldman projects the economy will recover as soon as 2009, making this downturn somewhat "recession-light."

    "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 a half percent," Goldman economists' Jan Hatzius and Ed McKelvey said in a research note.

    Goldman switched to an "outright recession call" following recent economic reports that indicated a spike in the jobless rate, and a decline in home sales and manufacturing. They also expressed concerns that sluggish consumer spending will contribute to a recession, which is typically defined as two quarters of economic contraction.

    The economists expect the Federal Reserve will aggressively lower rates to combat the credit crunch, including a half-point cut at its Jan. 29-30 meeting. The contracting economy is likely to push the unemployment rate to about 6.25 percent by late 2008, potentially hurting corporate earnings.

    Goldman also expects that Congress and the Bush Administration will push through a temporary tax break later this year as part of a fiscal stimulus plan.

    What would all this do to stocks and bonds?

    Economists predict that consumer spending will likely post a small outright decline -- unlike in the 2001 recession -- as the housing downturn contributes to a negative wealth effect and consumers find it harder to obtain credit.

    This will put pressure particularly on stocks in the consumer discretionary, financials, industrials, materials and information technology sectors. Sectors that might offer investors some protection in a recession, however, include health care, consumer staples, energy and utilities.

    Meanwhile, bond prices are expected to rally as risk-averse investors pull money out of stocks and boost demand for safer, albeit low-yield, investments. Goldman predicts the yield on the 10-year Treasury note -- which moves opposite its price -- will fall to 3.5 percent by late summer following interest rate cuts. The 10-year yielded 3.78 percent on Wednesday.
  2. maxpi


    When has a recession ever been that short and "light"? I don't recall one at all...
  3. mokwit


    The fabled 'soft landing'.
  4. Mvic


    What the headline really meant: GS is now long the market :)
  5. sumosam


    Why would a brokerage firm, (with all due respect to GS) ever admit to a severe recession?
  6. Yeah!, I was thinking the same thing.

  7. We dont need institutional traders/market manipulators tell us anything. We can figure out on our own.
  8. You should keep in mind the contradictory BS Abby Cohen has been spitting couple of day ago :

    S&P up 14 % this year at 1675...