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Paul Krugman (MIKE CLARKE/Mike Clarke/AFP/Getty Images)
Paul Krugman (MIKE CLARKE/Mike Clarke/AFP/Getty Images)

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Goldman Sachs: 1 in 3 chance of recession Add to ...

Paul Krugman at the New York Times continues to belittle Standard & Poor's downgrade of the U.S. credit rating, suggesting that falling U.S. Treasury yields on Monday morning might indicate that no one really cares.

"I’m fairly sure that if and when we get the whole story here, it will turn out that S&P was being political here, trying to do someone a favor — and it just wasn’t going to let facts get in the way of the downgrade it wanted."

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Ouch. However, the economic backdrop to the downgrade might be playing a more important role in stock market activity right now. Goldman Sachs (also via Mr. Krugman) has slashed its forecast for U.S. economic growth this year, now seeing real annualized growth between 2 per cent and 2.5 per cent through the end of 2012. That's not enough to bring down the unemployment rate, which the economists see rising to 9.25 per cent by the end of next year. They also see a one-in-three chance of a recession, and for three reasons:

"First, a worsening of the European financial crisis would hurt the economic outlook globally. Second, our forecast assumes that the payroll tax cut is extended for another year; if that failed to happen the fiscal drag in early 2012 would rise significantly. Third, the unemployment rate has increased in recent months, and such increases have historically had a tendency to feed on themselves."







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