Behind the Money

Goldman Sachs: Risks of a Recession are High and Rising

Risks are rising that the U.S. may fall into a shallow, yet prolonged and painful recession that could lift the country’s unemployment to 12 percent, according to a note by the Goldman Sachs economics team to clients.

Recession-themed newsprint cuttings

“Our base-case forecast continues to be that the US economy will avoid a recession, though the risks are high and rising,” wrote Zach Pandl, part of the influential team run by Jan Hatzius at the firm.

“While we do not think limited policy options would mean a deeper recession, they would likely imply a more tepid rebound. Whatever the outcome, a U.S. recession today would be painful.”

Ironically, the main reason why Goldman sees the recession as shallow is because the recovery from the last one has been so mild.

Specifically, the housing and auto markets are growing at their likely minimum rates so there really isn’t much room to fall, according to the note.

The S&P 500posted its worst quarter since the financial crisis in 2008, with a 14 percent decline. Investors will get a glimpse this week as to whether risks of recession are rising as key measures on the manufacturing and service portion of the economy are released. The September jobs report is Friday. 

Gross domestic product would likely contract by 1.4 percent during this shallow recession, smaller than the average retrenchment of 2.3 percent.

The good news this time around is that the banking system is in much better shape than during the big losses racked by the sector in 2008, according to the firm. The bad news is that monetary and fiscal policy measures that could hasten a recovery are (or have the perception of being) maxed out.

“Constraints on policy—a focus on deficit reduction in Congress and maybe a perception that monetary policy has reached its limits—are a potential negative,” wrote the economist. “While we do not think limited policy options would mean a deeper recession, they would likely imply a more tepid rebound.”

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