New York: With Merrill Lynch economist David Rosenberg asserting earlier this week that the US was already in a recession mode over the last month (See: Recession in the US already a reality: Merrill Lynch), it is now Goldman Sachs's turn to strike a warning note with a client note issued by the investment bank on Wednesday said that it expects the US economy to drop into recession this year.

A research note from Goldman's US economic team said that it has switched to an "outright recession call" with the housing slump and credit market turmoil spilling over into the broader economy, and with consumer spending taking a hit. "The latest data suggest that recession has now arrived, or will very shortly, " said Ed McKeley, senior US economist at Goldman Sachs in New York, in a note to clients.

Reports over the past week have revealed a spike in the jobless rate, and a fall in home sales and manufacturing activity.

According to Goldman, the recession is likely to last two to three quarters. Recession is typically defined as two quarters of contraction in economic activity.

Goldman's economists expect the Federal Reserve to respond by cutting interest rates aggressively, bringing the overnight target rate for borrowing between banks to 2.5 per cent by the third quarter, from its current 4.25 per cent.

The investment bank's client note also warns that real gross domestic product would contract by 1 per cent on an annualized basis in both the second and third quarters and that GDP would rise only by 0.8 percent for all of 2008.

It also warns that the unemployment rate will rise to 6.5 per cent in 2009 from the current 5 per cent.

The note strongly advises fund managers to be overweight on health care, consumer staples, energy and utilities. It also says that it will be significantly underweight on financials, industrials, materials and information technology.

The three most significant changes to their sector recommendations are the reduction in the financial sector weighting by 300 basis points to 14 per cent, the information technology weighting by 400 basis points to 15 per cent, and the increase in their health care weighting by 300 basis points to 17 per cent, the firm said.

(Also See: Recession in the US already a reality: Merrill Lynch)