Fears of a Recession Grow on Wall Street

Investment firm Goldman Sachs is predicting the U.S. economy will sink into a recession this year.

The report says the economic retreat could extend over two financial quarters and would likely push the unemployment rate up.

Some economists say the resilience of the U.S. economy will keep it expanding, if only slightly.

But Goldman Sachs' preeminence made a lot of people take notice.

Commerce Bancorp Chief Economist Joel Naroff agrees that pessimism has grown. He says the spike in unemployment in December to 5 percent from 4.7 percent is behind the gloomy sentiments.

"If we don't get job growth we don't get income growth, we don't get consumer spending, and we do get a recession," Naroff said. "So I think that it's the employment report that has created real uncertainty now where the economy is going."

Equally disturbing, he said, was a recent report from the Institute for Supply Management showing a big drop in manufacturing activity.

It suggested the troubles in the housing market have infected other parts of the economy.

The bad news has worn away at stock value, and Naroff said it has led to a debate at the Federal Reserve.

And it's a familiar debate: Is the economy growing so weak that the Fed needs to relax rates to encourage investment and keep people spending? Or, will a rate cut just make inflation worse?

"I think that battle is still on, but I think the recent weak, economic data has probably tipped the scales more in favor of the concern about recession," said Naroff.

Others concur. A group of 20 economists surveyed by Reuters believes the Fed will cut rates — the only question is by how much. Eight of them say a big cut, such as a half percentage point, is coming.

The debate may be settled shortly. Federal Reserve Chairman Ben Bernanke might give a clue about interest rates in the U.S. during a speech on monetary policy later Thursday.

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