US Recession Risk Tops 50%

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The financial crisis in Europe and the lingering effects of the earthquake and tsunami in Japan have heightened the risk of a second recession in the US in the first half of 2012. That’s the conclusion of researchers at the Federal Reserve Banks of San Francisco and St. Louis, published in an economics letter today.

Here’s a chart included in their letter. The solid blue line represents the current assessment.

The danger of a double-dip was high when these researchers issued an earlier version of this letter in 2010. Since then, the risks have risen and the soft US economy may not be able to withstand the threat. On its own, the US economy faces a low risk of a second recession. It is when international factors are added in that the risk increases to more than 50%.

From the report: “Risks are highest in the very short run, but then fade. In combination, the data suggest vigilance. The U.S. economy is fragile with limited ability to withstand shocks. Yet, as the economy strengthens, recession risks will gradually abate beginning in the second half of 2012.”

The rather hopeful conclusion is based on a permanent solution to the European sovereign debt crisis. That solution remains elusive, but if one is not found, a default on European sovereign debt “may well sink the United States back into recession.” Fasten your seatbelts.

Paul Ausick