Housing slump ups chance of recession: Goldman Sachs

By Herbert Lash

NEW YORK (Reuters) - The housing slump has increased the chance of a U.S. recession and will further weaken home prices, Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz) said on Tuesday, cutting its stock recommendations on a slew of companies vulnerable to sluggish growth.

In a grim assessment of the U.S. economy's health, the investment bank said the Federal Reserve will have to cut its lending rate to banks by 1-1/2 percentage points to 3 percent in the next six to nine months to avert a recession.

Weakness in construction and consumption will likely shave 2 percentage points from real U.S. economic growth in 2008, and will likely increase the unemployment rate to 5.5 percent from the current 4.7 percent, the U.S. investment bank said.

The effect of a U.S. housing market that is "mired in a full-blown vicious cycle" suggests the risk of recession has risen to a range of 40 percent to 45 percent, Goldman said.

Home prices will likely decline by 15 percent from their peak. But if the United States enters a recession -- which Goldman expects the economy to narrowly escape -- home prices could fall as much as 30 percent nationwide, it said.

Citing economic weakness, Goldman analysts cut their rating on industries involved in a wide swath of the U.S. economy, including automobiles, airlines, hotels, truckers, human resources and staffing providers.

It also cut office furniture sectors, real estate investment trusts, or REITs, dining stocks and base metals.

But Goldman upgraded U.S. tobacco companies as investors seek so-called defensive positions in sectors that do well when the economy slows or enters a recession.