Recession is more likely in the U.S. due to the debt crisis and slow growth in Europe, says the Federal Reserve. How are the two linked?
Recession risks are rising in the United States, according to a Federal Reserve report released yesterday that notes growing threats to the U.S. economy from the debt crisis and slow economic growth in Europe.
“Gathering storms across the Atlantic threaten a U.S. economy not yet recovered from the last recession,” said the Federal Reserve Board of San Francisco in an Economic Letter updating the recession risks for the United States. The report gives the U.S. a greater than 1-to-2 chance of entering a recession in the early months of 2012. “Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic.”
Earlier forecasts by the San Francisco Fed put the risk of recession at 1-in-3, but the probability remains “elevated and may have increased over the past year, in part because of foreign financial and economic crises.”
The uncertainty created by the Greek debt crisis and fears the crisis will spread to other European countries negatively impacts the U.S. economy, said the Fed, noting that “the crisis has resulted in escalating volatility in equity markets and the lowest interest rates on long-term U.S. Treasury securities since the 1940s. A European sovereign debt default may well sink the United States back into recession.”
Dimming growth prospects for the major industrialized economies also put the fragile U.S. economy at risk. Growth in the G-7 countries, which include France, West Germany, Italy, Japan, the United Kingdom, the United States and Canada - is expected to remain below 1 percent with a 50 percent chance of shrinking, said the report.
The March 2011 earthquake and tsunami in Japan, which created greater than expected disruptions in the supply chain to the U.S., serve as a recent example of how the U.S. economy is vulnerable to outside events, said the Fed. “Fluctuations in U.S. economic activity sometimes have an international component,” said the report referring to the oil crises stemming from the 1972 OPEC embargo and the 1979 Iranian revolution.
“Although financial crises in advanced economies are rare, they can leap continents and borders with tremendous facility, as we learned in 2008,” said the Fed. Researchers found that if the U.S. can maintain growth during the second half of 2012, the dangers of recession will “recede rapidly” in 2013.
Investors surveyed by Millionaire Corner are still feeling the effects of the recession and slow recovery. One-third has increased their savings and nearly 30 percent have paid down their debt, according to an October survey of 843 investors of a range of wealth levels. Even Millionaire households report the need for one of their members to take a second job or return to work either part-time of full-time. More than 17 percent of Millionaires have had to dip into savings as a result of the recession and prolonged downturn.