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Goldman Sachs: 2016 looks like a dud for the economy

"Flat is the new up."

That's the pithy, and sobering, assessment of Goldman Sachs (GS) in predicting what's in store for the U.S. economy and for investors next year. The investment bank on Tuesday cut its forecast for 2016 U.S. economic growth to 2.4 percent, down from a previous estimate of 2.8 percent.

That sharply reduced estimate would barely exceed Goldman's forecast for 2015 growth and only match the tepid pace of expansion last year, a sign the economic recovery is running in place rather than sprinting ahead as many economists were predicting late last year.

In forecasting global gross domestic product growth next year of 3.7 percent, down from Goldman's previous forecast of 4.3 percent, the firm underscored the fear that has so many investors running scared: China's once high-flying economy is losing altitude faster than officials in Beijing care to admit.

"China is growing much slower than we previously assumed," Goldman analysts acknowledged in a note. The bank sees Chinese GDP rising 6.4 percent next year, compared with the current official rate of 7 percent.

What China is doing to curb its market crisis 01:51

As if to underline the point, the Chinese government said Monday that the country's industrial behemoths saw profits plunge nearly 9 percent in August, the sharpest decline in nearly four years.

"The Chinese economy has slowed noticeably during the last few months, with some observers believing the true pace of economic growth may be lower than that implied by GDP," Goldman said, alluding to the widely held view on Wall Street that China's actual growth rate is significantly lower than official numbers suggest.

Oxford Economics economist Oren Klachkin said in a note that China's economic activity is slowing at an "alarming" pace, adding that the country's move in August to lower the value of its currency has hurt investor confidence in the country's economy and worsened capital outflows.

Investors have taken notice, with the S&P 500 on Tuesday finishing with a minuscule gain of 0.1 percent after five days of losses, while stock markets in Asia and Europe retreated. According to Barclays, global equities are closing in on their worst quarterly performance since 2011.

Citing its expectations for softer growth in China and the U.S. next year, along with an ongoing slump in oil prices, Goldman also lowered its earnings estimates and price targets for the S&P 500 (SPX). The firm now expects the S&P 500 to end the year at 2,000 -- down from a previous estimate of 2,100.

The concerns aren't confined to China. Brazil, India, Russia and other major emerging markets also have faltered as global demand for commodities including oil and copper weaken. These economies have taken on added importance in recent years, and today account for upwards of 60 percent of world GDP. Investors worry that a continued slowdown in these countries, along with in China, could metastasize into a full-blown crisis next year.

Unlike in previous crises in developing economies, including in Asia in the late 1990s, central bankers around the world have less room to reduce borrowing costs to boost growth, with rates still scraping bottom. The upshot? Policy makers have less ammunition if conditions worsen.

Goldman's downbeat assessment for 2016 dovetails with other factors weighing on stocks. Perhaps most important, Federal Reserve officials have all but promised to hike short-term interest rates in December for the first time in nine years.

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Although such a "liftoff" would express confidence in the U.S, economy's fundamental strength, some experts fear that even a small uptick in borrowing costs for consumers and businesses could curb growth, while also reducing the flow of "easy money" that has fueled investors' gains during the five-year bull market that followed the recession.

Perhaps more nettlesome, House Speaker John Boehner's surprise announcement Friday that he is leaving Congress heightens the risk of a clash in Washington over the U.S. debt ceiling, which the government will reach in November. Previous fights over the nation's borrowing limit has rattled investors.

But not everyone is fretting about the U.S. economy's prospects.

"Currently, the U.S. indicators are fairly sturdy," said Kelly Bogdanov, portfolio analyst with RBC Wealth Management, noting that she expects corporate earnings to rise next year. "We're not seeing any significant recession risks cropping up now. Employment is solid, the service sector continues to be quite strong, personal income is growing and consumer spending looks good."

She also downplays the risk of a "hard landing" for China, reasoning that Chinese consumers are continuing to spend despite the downturn.

"Fears over a global slowdown, and China, are a bit overdone," added Scott Wren, senior global equity strategist, Wells Fargo Investment Institution, which expects the world's second-largest economy to grow 6.8 percent this year. "We want our clients to buy on this dip."

Ed Yardeni, president of institutional advisory firm Yardeni Research and a noted "bull" when it comes to charting the financial markets, touts the economy's resilience in the face of mounting headwinds around the world. Yet even he concedes that the U.S. is feeling the chill blowing from across the Pacific.

"The question is if China drags us down or if we grow fast enough to offset their drag," he said.

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