Goldman says recession risk rising by Colin Barr @FortuneMagazine July 18, 2011, 10:52 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons A recession is “clearly a possibility,” the bank that until recently was America’s biggest booster said in cutting its economic growth forecasts yet again. Goldman Sachs, which just seven months ago was the loudest voice for a stronger than expected U.S. recovery, now expects U.S. output to creep ahead at a snaillike 1.5% clip in the second quarter and a less than vigorous 2% in the third. Friday’s call stands as quite a comedown for economist Jan Hatzius, who in May forecast a 2% expansion in the second quarter and a 3.25% gain in the third quarter – numbers that themselves represented a retreat from the firm’s bullish start-of-the-year forecast. Recessionary? A forecast downgrade alone doesn’t spell economic downturn, of course, but there is ample reason to suspect a deeper malaise is at work: Consumer confidence fell “off a cliff” last month, Bank of America economist Joshua Dennerlein wrote in a note to clients Friday, dropping almost 20% in the most recent reading. That puts the consumer sentiment index at a level last seen in 2009, when Citi C was assumed to be bankrupt and the stock market fetched half its current price. Dennerlein wants to blame that plunge on the debt ceiling debacle, but Hatzius notes less soothingly that final sales rose at a sub-tepid 0.5% clip in the first half. That is almost always a sign of economic contraction, even when nuts in Washington aren’t trying to blow up the economy for the sake of appearing “fiscally responsible.” Double dip, here we come. “There is only one precedent in the postwar period for such weak demand growth outside the immediate vicinity of a recession,” Hatzius writes. Even if we don’t end up with an economic downturn, slower growth means unemployment will stay higher for longer — which will make it hard to tell the difference. Goldman now expects joblessness to fall just slightly by the end of next year, to 8.75% from a recent 9.2%. Earlier this year the firm was predicting end-of-2012 joblessness of 8.25%, which is not exactly something to celebrate but actually looks pretty good now. And if a recession does take hold, it could mean another round of Federal Reserve stimulus, as much as Ben Bernanke might like to stop running that particular play. “If the economy returns to recession—not our forecast, but clearly a possibility given the recent numbers—Fed officials would undoubtedly ease anew even if inflation is close to their target,” Hatzius writes. That kind of talk marks quite a reversal for Hatzius, who last fall was among the first forecasters to throw his weight behind a stronger-than-expected U.S. recovery. He wrote in upgrading his growth forecasts last December that so-called organic economic activity, excluding government stimulus and inventory effects, was starting to lift off. But if that recovery was ever on track, it was derailed this spring by the surge in energy prices and the earthquake that relegated Japan to the economic sidelines for a few months. Accordingly, Goldman – which at one point was predicting U.S. output would rise at a 3.5%-4% clip this year and in 2012 – is now saying economic numbers will have to show “substantial improvement” just to keep the firm from cutting its fourth-quarter and 2012 growth forecasts. That could mean 9% unemployment will be here for some time, whatever forecasters claim. But if good news for job seekers is hard to come by, consider for a moment how hard this year has been for economists. One bit of frustration shared by Bernanke and Hatzius is that their models aren’t saying what exactly is sapping the demand that they expected to pick up. Common sense might well dictate that a credit bubble that took the better part of a decade to build up wouldn’t necessarily be squared away in just three or four years, but apparently there is no formula that says this is so. This is what passes for mystery among dismal scientists. “The ‘bugbear’ is that we are still unsure about the precise reasons for the slowdown in 2011 to date, which is sharply at odds with our expectation at the end of last year that growth would accelerate in 2011,” Hatzius writes. “Logically, the explanation presumably has to involve a combination of a) unforeseen shocks from the Japan earthquake and the oil market, coupled with b) more vulnerability to these shocks, because c) the housing and credit market downturn is weighing on private-sector balance sheets for even longer than we thought. But the relative importance of these issues is exceptionally difficult to sort out, and it makes a great deal of difference for the outlook.” Or rather, it makes no difference to the outlook. What makes a difference there is that lots of people have no money and even more lack confidence they will be employed a year from now, so no one is spending. One day economists may decide to open their eyes to these obvious truths, but not just yet. Even with the economy at stall speed and Europe on the verge of collapse, wishful thinking carries the day.