Goldman Sachs Sees 25 Percent Chance of Double Dip

Thursday, 19 Aug 2010 09:12 AM

By Dan Weil

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Goldman Sachs economists see a 25 percent to 30 percent chance that the U.S. economy will fall back into recession.

“As signs of slower U.S. growth have multiplied, market participants have become worried about the possibility of a double-dip recession,” Goldman economists wrote in a report obtained by several news organizations.

“The probability is unusually high — between 25 percent and 30 percent.”

But that’s not their base case, the analysts stress.

“A big reason for this judgment is that several key components of private-sector activity have already fallen to levels that are quite low relative to historical averages or underlying fundamentals."

In other words, things are so bad that they can’t get much worse.

The components include housing, capital spending, autos and other consumer goods, household savings and employment.

On the job front, “Companies have so far done little to reverse the steep payroll cuts implemented during the recession,” Goldman notes.

That suggests, “they may have some room to absorb disappointments in demand before they resort to renewed layoffs."

Pimco CEO Mohamed El-Erian also sees a 25 percent chance of a double-dip recession. And he told Bloomberg that deflation represents a genuine threat.

Investors can’t rely on the Federal Reserve to come to the rescue, he says.

“It doesn’t have enough instruments for what we’re looking at,” El-Erian told Bloomberg. “Structural problems require structural solutions. We’re not getting any.”

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