The economy will shrink 3.5 percent in the fourth quarter and 2 percent in the first quarter, compared with previous estimates of 2 percent and 1 percent, Goldman economists led by Jan Hatzius wrote in a research note today. That would be the largest back-to-back quarterly contraction since the start of the second year of Ronald Reagan's presidency.
There's an "accumulation of evidence that U.S. domestic demand and production continue to fall sharply,'' wrote Hatzius, chief U.S. economist at Goldman. "The persistence of economic weakness will keep pressure on policymakers to provide additional stimulus to the economy.''
Goldman's call reflects mounting concern that growing numbers of companies and consumers will lose access to credit as the worst financial crisis since the Great Depression prompts banks to rein in lending. The Federal Reserve will lower its benchmark overnight target rate by half a point to 0.5 percent before year-end as part of an effort to bolster bank lending, Goldman said.
Futures on the Chicago Board of Trade show a 94 percent probability the Fed will cut its overnight target rate to 0.5 percent next month. The odds were 55 percent a week ago. Goldman said Fed policy makers may opt to cut the rate before their next meeting on Dec. 16.