Goldman Sachs warns of recession

WASHINGTON -- The U.S. economy may already be in recession and the Federal Reserve will respond by slashing interest rates, economists at Goldman Sachs Group Inc. forecast Wednesday, joining counterparts at Morgan Stanley and Merrill Lynch.

"Recession has now arrived, or will very shortly," Goldman's chief U.S. economist Jan Hatzius wrote in a note to clients. The downturn will last two to three quarters and be "relatively mild by historical standards," he wrote.

The Fed will cushion the downturn by reducing its target rate to 2.5 percent by late 2008, Hatzius said. Central bankers will lower the rate by a half percentage point to 3.75 percent at the next meeting Jan. 30.

After stalling this quarter, the world's largest economy will shrink at a 1 percent pace in the following six months, according to the forecast. The expansion will resume in the last three months of the year.

For all 2008, Goldman economists forecast growth of 0.8 percent. The unemployment rate will rise to an average 6.2 percent in the fourth quarter from December's 5 percent, Goldman said.

Still, most economists surveyed by Bloomberg News this month forecast the economy would skirt recession. Growth will average 1.5 percent in the first six months of 2008, matching the fourth quarter's pace, according to the median estimate of 62 economists surveyed by Bloomberg News from Jan. 3 to Tuesday. There was a 40 percent chance a recession would occur in the next year, according to the survey median.