Investment Bank Sees Recession; S&P Battered in 2008

Goldman Sachs said yesterday it is confident the economy is entering a recession, adding significant support to a similarly negative prediction issued by economists at Morgan Stanley earlier this week.The investment bank said in a research note that the economy may already be in a recession, or will fall into one within three months. Both Morgan Stanley and Goldman Sachs pointed to weak employment data and the impact of credit and housing woes on the economy.“The unemployment rate has now risen by more than 1/3 percentage point from the cycle trough. Historically, this has invariably been associated with recession, typically starting immediately and almost always within three months,” Goldman Sachs’s chief economist for America, Jan Hatzius, wrote.Goldman Sachs and Morgan Stanley are not alone in their assessment.The founder and principal of Camilli Economics, Kathleen Camilli, said there is a “100% certainty” America is in a recession. She predicted the National Bureau of Economic Research would place the “start date” of the recession in the fourth quarter of 2007.Still, there are some economists who say America will dodge the recession bullet. “I think we’ll probably slide through 2008 without a recession, even though we will get very close to one,” Michael Cosgrove, the principal for Econoclast, a Dallas-based economic research firm, said.Even the Goldman Sachs and Morgan Stanley economists who predict a recession say it will not be severe. “The downturn will be comparatively mild and short,” the chief economist for America at Morgan Stanley, Richard Berner, wrote. “After all, recessions abroad are unlikely, so global growth will still be a prop.”Mr. Hatzius predicted a “relatively mild” recession, lasting two to three quarters. “Despite our near-term concerns, we are quite optimistic about the economy’s longer-term prospects,” he wrote.The Federal Reserve will be able to keep the recession from becoming too deep by cutting its key interest rate, known as the federal funds rate, Mr. Hatzius said.“We expect Fed officials to set aside their residual inflation concerns and cut the fed funds rate aggressively to 2.5% by late 2008, with a 50-basis-point cut at the January 29–30 FOMC meeting,” he wrote.He added that “there is a decent chance that Congress and the Bush administration will agree on a temporary tax cut to take effect later this year, especially if the economic data remain weak.”Stock traders opened the New Year fearing the worst, sending the S&P 500 index down more than 5% during the first five trading days of 2008. The fall was the worst start to a year that the S&P 500 has experienced since its inception in 1926.While stock prices fell, gold prices skyrocketed this week, climbing to record highs of more than $880 an ounce. Often, when there is concern about the value of the dollar and the strength of the economy, investors buy gold.The presidential race could also be contributing to gold’s new highs, the chief economist at Moody’s Investor Service, John Lonski, said. The market may be concerned that a Democratic president would change tax and trade policies in ways that could further slow the American economy, and thereby hurt the dollar.

Investment Bank Sees Recession; S&P Battered in 2008

Investment Bank Sees Recession; S&P Battered in 2008

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