Housing Slump Ups Chance of Recession

A "foreclosure" sign tops a "for sale" sign outside a home in Denver. A new report says rising foreclosures will cost major U.S. cities billions of dollars in lost economic activity next year.

NEW YORK (By Herbert Lash, Reuters) November 28, 2007 — 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) 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.

Goldman downgraded the U.S. automobile sector to "cautious," in part due to growing concerns about the U.S. macroeconomic outlook and its implication for auto sales.

It cut the U.S. airline sector to "cautious" from "neutral," citing the economy and rising fuel costs.

But Goldman raised UAL Corp (UAUA.O: Quote, Profile, Research), the parent of United Airlines, to "buy" from "neutral" and Alaska Air Group (ALK.N: Quote, Profile, Research) to "neutral" from "sell." It downgraded US Airways Group (LCC.N: Quote, Profile, Research) to "sell."

Goldman lowered its rating on the U.S. hotel sector to "cautious" from "neutral," calling an end to the sector's long-running boom. Among companies that Goldman cut were Marriott International Inc (MAR.N: Quote, Profile, Research), Starwood Hotels & Resorts Worldwide Inc (HOT.N: Quote, Profile, Research) and Wyndham Worldwide Corp (WYN.N: Quote, Profile, Research).

Since peaking in July, the Standard & Poor's hotels index (.GSPHOTL: Quote, Profile, Research) has fallen 19 percent, compared with the Standard & Poor's 500 Index's (.SPX: Quote, Profile, Research) 8 percent fall over the same period.

Goldman reduced its rating on U.S. REITs to "cautious" from "neutral" and cut property companies Vornado Realty Trust (VNO.N: Quote, Profile, Research) and General Growth Properties (GGP.N: Quote, Profile, Research), among others.

The base metal sector was cut to "neutral" from "attractive." Companies whose ratings were cut included Alcoa Inc (AA.N: Quote, Profile, Research), Freeport McMoRan Copper & Gold Inc (FCX.N: Quote, Profile, Research) and Southern Copper Corp (PCU.N: Quote, Profile, Research).

Goldman said slower growth and a weakening labor market would delay a rebound in the restaurant industry. Analysts trimmed stock price targets on sit-down chains: P.F. Chang's China Bistro Inc (PFCB.O: Quote, Profile, Research), Ruth's Chris Steak House Inc (RUTH.O: Quote, Profile, Research), Chili's parent Brinker International Inc (EAT.N: Quote, Profile, Research), Cheesecake Factory Inc (CAKE.O: Quote, Profile, Research), and Red Lobster and Olive Garden parent Darden Restaurants Inc (DRI.N: Quote, Profile, Research).