Goldman Sachs: Worst Recession in a Generation

A bracing forecast from the econ team at Goldman Sachs:

Despite the passage of the Emergency Economic Stabilization Act (EESA), the recession is likely to deepen, with outright declines in real GDP in coming quarters.... Our new forecasts include an increase in the unemployment rate to 8% by the end of 2009, up from a cyclical trough of 4½% in early 2007.  Assuming a “sustainable” unemployment rate of 4½-5%, this would imply the largest amount of slack in the economy since the early 1980s.  As a result, we expect a sharp slowdown in both headline and core inflation in 2009 and 2010....  Our baseline forecast is a decline in the [federal] funds rate target to 1%—the level reached in 2003, which was apparently “safe”—but we would not rule out a move to even lower rates.... There is a good chance of additional fiscal stimulus in 2009.  However, the difficulty of anticipating the contours of fiscal policy under a new administration—and more specifically, the implementation of the Troubled Asset Relief Program—is one reason why the US economic outlook is unusually uncertain at present.