(Reuters) - Goldman Sachs on Friday lowered its U.S. growth forecast citing a fiscal policy stagnation, record increase in unemployment and a sharp decline in profits, deepening and extending the expected recession.
Goldman said it now expects U.S. GDP to fall 5 percent in the current quarter, with unemployment rate reaching 9 percent in the fourth quarter of 2009.
It also forecast the 10-year yield to fall to 2.75 percent by the end of the first quarter of 2009, as compared to previously estimated 3.5 percent.
"The combination of weaker real activity and slower inflation means that profits of U.S. companies will fall even more sharply than we had previously expected," Goldman said in a note to clients.
Goldman now sees economic profits falling 25 percent in 2009 on an annual average basis, the biggest drop since 1938. It had earlier expected a fall of 20 percent.
Goldman expects unemployment rates to further go up in 2010 as well, as there is little chance of the economy returning to trend growth by that year.
The GDP growth is expected to fall 3 percent and 1 percent in the next two quarters, bringing the drop in GDP close to the decline seen in 1982, economists at Goldman Sachs said.
"We have marked down our forecasts for US real GDP in response to continuing signs of falling domestic and foreign demand, labor market deterioration, renewed tightening in financial conditions, and an apparent impasse in fiscal policy pending the transfer of power to the Obama administration in late January," economists led by Jan Hatzius said.
Goldman had earlier expected a 3.5 percent fall in GDP for the current quarter and a 2 percent fall and zero growth for the subsequent two quarters.
Although a worsening economy is a major driver of the estimate cuts, the U.S. government's financial policy, which led to the tightening in financial conditions was the main reason for the adjustments, the economists said.
As the economy contracts, inflation pressure has started to ease. "However, we do not expect a broad-based, sustained pattern of significant price decline that would normally be associated with the term 'deflation' over the forecast horizon," they said.
Goldman analysts also said the next round of bailout plan will exceed their earlier estimate of $200 billion.
Reporting by Anurag Kotoky in Bangalore; Editing by Gopakumar Warrier