Wall Street powerhouse Goldman Sachs told clients that it expects the US economy to drop into recession this year. Its prediction is that unemployment will rise to 6.5% and that the fed will cut rates by an additional 1.75 percentage points to try to spur growth. Goldman Sachs Sr. Economist Ed McKelvey expects, though, that the recession, which may have already arrived, will be relative short.
"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," McKelvey said in a research note.
Goldman’s move from caution to an outright recession call came as the housing slump and the subprime fallout in the credit markets appears to have spilled over into the broader economy. Recent evidence of that was this week’s government report showing a rise in the jobless rate to 5%. Goldman Sachs economic team is now expecting that to go to 6.5% by late 2008 and that consumer spending will take a dive. To try to counteract the recession, the fed is predicted to cut its benchmark fed funds rate, the overnight loan rate for borrowing between banks, to 2.5% from the current 4.25%. However, McKeley and his associates predict the recession will run only two or three quarters and that the economy will gradually recover in 2009.
Goldman Sachs does see some safe harbors from investors. As you’ve probably guessed, the media sector is not one of them. The report suggests overweighting investments in health care, consumer staples, energy and utilities.