Goldman Sachs: US Economy May Be 'Fairly Bad'

Wednesday, 06 Oct 2010 06:57 AM

 

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Goldman Sachs Group Inc. said the U.S. economy is likely to be “fairly bad” or “very bad” over the next six to nine months.

“We see two main scenarios,” analysts led by Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients.

“A fairly bad one in which the economy grows at a 1 1/2 percent to 2 percent rate through the middle of next year and the unemployment rate rises moderately to 10 percent, and a very bad one in which the economy returns to an outright recession.”

The Federal Reserve will probably move to spur growth as soon as its next meeting on Nov. 2-3, Hatzius said. Expectations for central bank action have already led to lower interest rates, higher stock prices and a weaker dollar, according to Goldman, one of the 18 primary dealers that are required to bid at government debt sales.

Fed Chairman Ben Bernanke and his fellow policy makers are debating whether to increase Treasury purchases to spur the U.S. economy by keeping borrowing costs low. U.S. five-year yields dropped to a record 1.1755 percent Wednesday amid signs the recovery is losing momentum.

The “fairly bad” outlook for slow growth and rising unemployment without a recession will probably be the one that occurs, the e-mail said.

Renewed Recession

Hatzius’ note reiterated comments he made Tuesday at a forum in Washington, when he placed the odds of a renewed recession at 25 percent to 30 percent. He told reporters that was up from 15 percent to 20 percent at the start of the year.

Another $1 trillion of asset purchases by the Fed would probably lower long-term interest rates by about 0.25 percentage point, adding a “few tenths of additional GDP growth,” he said.

The Fed bought $1.7 trillion worth of Treasury and mortgage debt in a program that ended in March. The purchases helped push mortgage rates to historic lows.

New York Fed President William Dudley, the Boston Fed’s Eric Rosengren and Chicago’s Charles Evans have all advocated further Fed action. Bernanke said Oct. 4 that restarting large-scale asset purchases would probably spur growth, after saying last week the central bank has a duty to aid the economy as unemployment holds near 10 percent.

Investors forecasting Fed purchases pushed two-year Treasury yields to a record low of 0.3987 percent on Oct. 4. The Standard & Poor’s 500 Index rose 2.1 percent yesterday to the highest level since May.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, slumped 0.9 percent Tuesday to the lowest since January.

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