Nov. 7 (Bloomberg) -- Goldman Sachs Group Inc. forecast the deepest U.S. economic recession since 1982 after the unemployment rate climbed to a 14-year high and payrolls tumbled for a 10th consecutive month.

The economy will shrink 3.5 percent in the fourth quarter and 2 percent in the first quarter, compared with previous estimates of 2 percent and 1 percent, Goldman economists led by Jan Hatzius wrote in a research note today. That would be the biggest back-to-back quarterly contraction since the start of the second year of Ronald Reagan's presidency.

``Things are still deteriorating,'' Hatzius, chief U.S. economist at Goldman, said in an interview on Bloomberg Television. The fourth quarter will ``be weaker than the third quarter and probably by quite a lot.''

Goldman's call reflects mounting concern that growing numbers of companies and consumers will lose access to credit as the worst financial crisis since the Great Depression prompts banks to rein in lending.

The Federal Reserve will cut its benchmark overnight target rate by half a point to 0.5 percent by year-end while President- elect Barack Obama and congress work out a stimulus package of at least $200 billion to shore up growth, Goldman said.

Futures on the Chicago Board of Trade show a 94 percent probability the Fed will cut its overnight target rate to 0.5 percent next month. The odds were 55 percent a week ago. Goldman said Fed policy makers may opt to cut the rate before their next meeting on Dec. 16.

`Additional Stimulus'

``The persistence of economic weakness will keep pressure on policymakers to provide additional stimulus to the economy,'' Hatzius wrote in today's report.

Goldman's forecasts are among the most bearish on Wall Street. The median forecast in a Bloomberg News survey of economists is for a 0.4 percent contraction in the fourth quarter and growth of 0.5 percent in the first quarter. The economy shrank 0.3 percent in the third quarter after growing 2.8 percent in the second.

Payrolls shrank by 240,000 workers last month after declining a revised 284,000 in September, the Labor Department said today. Economists forecast a drop of 200,000 in October, according to the median estimate in a Bloomberg News survey.

The unemployment rate jumped to 6.5 percent in October. It will climb to 8.5 percent by the end of 2009, Goldman said.

Volcker's Rate Increases

The number of Americans receiving unemployment benefits surged to the highest level since 1983. a Labor Department report showed yesterday. A day earlier, the Institute for Supply Management said its non-manufacturing index, which covers almost 90 percent of the economy, decreased to 44.4, the lowest since records began in 1997. A reading below 50 signals contraction.

There's an ``accumulation of evidence that U.S. domestic demand and production continue to fall sharply,'' wrote Hatzius.

Goldman's GDP contraction calls would mark the steepest recession since the economy shrank 4.9 percent in the fourth quarter of 1981 and 6.4 percent in the first quarter of 1982 after Fed chairman Paul Volcker drove the overnight interbank rate to as high as 20 percent to stem inflation.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

Last Updated: November 7, 2008 13:16 EST