San Francisco Fed Warns of High Recession Risk for U.S. ~ 1550 KIVA

San Francisco Fed Warns of High Recession Risk for U.S.:

The outlook is growing grimmer for the U.S. economy, as the risk of a new recession fueled by European troubles has risen, a new paper from the Federal Reserve Bank of San Francisco argues.

In the analysis released Monday, the central bank researchers say the U.S. economy is particularly vulnerable to shocks right now. If something were to strike the nation at this time of already weak growth, contracting gross domestic product would be hard to avoid. The most obvious recession trigger is the worsening and unresolved government debt crisis currently roiling Europe, the authors note.

“The odds are greater than 50% that we will experience a recession sometime early in 2012,” the paper states.

“The message is clear,” economists Travis Berge, Early Elias and Oscar Jorda warn. “A European sovereign debt default may well sink the United States back into recession,” and “prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic.”

The paper arrives at a time of considerable anxiety. While there is some evidence in recent economic data that the serious slowdown in U.S. activity seen this year might be breaking toward better momentum into the closing months of the year, unpredictable events hang over the nation. The government debt crisis that has ensnared the European Union has deeply unsettled financial markets and led to political turmoil, and what appears to be a near certain recession in that region.

Most economists agree it will be hard for the U.S. to remain immune to European problems given the level of trade between the two zones and the interconnected nature of financial markets. Already, one major U.S. investment bank, MF Global, has run aground due to soured European investments.

The European saga comes as Fed officials have recently downgraded their collective economic outlook. Many private sector economists increasingly agree the U.S. central bank will soon undertake new actions to stimulate growth and lower high levels of unemployment.

The paper stressed that international linkages between regions are more important than many now recognize, and that if the U.S. was considered by itself, the odds of a new recession fall to around 30%.

Perhaps the silver lining for the U.S. is the fact that if the next few months can be navigated without any major turbulence, economic models suggest the outlook should grow brighter.

“Recession odds based on international factors peak at about 45% toward the end of 2011, but decline rapidly thereafter,” the paper states. “If we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.”