Goldman Sees Higher Recession Risk; Cuts Ratings

Includes: AGG, DIA, QQQ, SPY
by: Judith Levy

Goldman Sachs is giving higher odds to the likelihood of a U.S. recession in 2008 and has slashed ratings on a host of companies it considers exposed to slowing growth. Economists at the investment bank have lowered their interest rate forecast to 3% by mid-2008, a 1.5 percentage point cut from its present level, from a previous 4%. "The main reason is that the worsening housing downturn has pushed the risk of a U.S. recession in 2008 to 40%-45%, from around 30% previously," Goldman said. The housing market is "mired in a full-blown vicious cycle." The bank expects construction and consumption to cut two percentage points from real growth next year and sees the unemployment rate rising to 5.5% from 4.7%. Home prices are forecast to drop 15% from their highs, but if the economy does enter recession, they could fall 30%, Goldman said. The bank cut ratings on companies in industries including the entire auto sector, airlines (US Airways), hotels (Marriott, Starwood, Wyndham), truckers, human resources providers, furniture, REITs (Vornado, General Growth Properties), dining stocks, and base metals (Alcoa, Freeport McMoRan Copper & Gold, Southern Copper) but raised ratings on defensive sectors like tobacco. In related news, Allan Hubbard, economic advisor to President George Bush, told CNBC Tuesday that recession risk is higher than it was last year but remains below 50:50. "We obviously have problems in the housing sector and we have problems in the financial sector, but... real America is doing just fine," he said. Also, former Treasury Secretary Lawrence Summers wrote in the FT Monday that the subprime collapse means "the odds now favor a U.S. recession that slows growth significantly on a global basis."

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