Chance of US recession in 2012 tops 50%

Yes, but fear not - things are supposed to be looking up in the second half of 2012.

Cue Judy Garland: "Somewhere Over the Rainbow..."


While it is difficult to gauge the odds precisely, an analysis of leading U.S. economic indicators suggests a rising chance of a recession through the end of the year and into early next year, researchers at the regional Fed bank wrote on Monday. The risk of recession recedes after the second half of 2012, they found.

New governments in Greece and Italy, with fresh promises to tackle fiscal problems have in recent days, allayed investor concerns about a near-term sovereign debt default in the euro zone, but Europe's debt crisis is far from resolved. The region is facing its worst hour since World War II, German Chancellor Angela Merkel said on Monday.

Although domestic threats to economic growth in the United States are limited, a shock from abroad could derail a fragile recovery.

The weak U.S. economy is more than usually vulnerable to turbulence beyond its borders, as the unexpectedly severe U.S. effects from Japan's devastating earthquake in March demonstrates, the researchers said.

"A European sovereign debt default may well sink the United States back into recession," wrote Travis Berge, Early Elias and Oscar Jorda in the latest San Francisco Fed Economic Letter. "However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.

The assessment of recession risk is more dire than that of many private economists. A November 4 Reuters poll of primary dealers shows Wall Street economists see a 30 percent chance of a U.S. recession next year, down from 35.5 percent a month earlier.

The problem that private economists didn't realize is that we are a lot more exposed to Euro debt contagion than previously thought. And while the immediate crisis has been salved with the new Greek and Italian governments taking the reins, the fundamental issues still remain; too much debt, not enough buyers for bonds of troubled countries.

Every bond sale in Italy and Greece for the foreseeable future will be fraught with suspense. Every panic attack by euro investors will bring the EU to the brink of collapse. It could all melt down at any time and there's nothing we can do about it except watch.

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