Europe's sovereign debt crisis is pushing the chance of a U.S. recession above the 50% mark. So says the San Francisco Fed.
Right now, the biggest threat to the U.S. economy is well out of Washington's hands.
That sobering bit of news comes courtesy of the Federal Reserve Bank of San Francisco, which released a report today finding a greater than 50% chance that the country will slip into a new new recession by early 2012. The big risk factor: Europe's sovereign debt crisis, which its leaders seem pathologically incapable of solving.
That Europe's mess might imperil the health of the U.S. recovery isn't a shock, especially to anybody who has been following the operatic twists and turns in Italy and Greece during the past few weeks. There's a reason President Obama said the crisis was "scaring the world." But according to the Fed's official estimate, the threat posed by a financial disaster across the Atlantic is now a bigger concern than any domestic weaknesses in the economy.
Note that domestic risk factors top out no higher than 30%. During the next few months, however, international risk factors hover closer to 45%. Between the two, probability says we're headed for a recession. The bank's researchers do offer one note of comfort, pointing out that it's difficult to precisely assess economic threats from abroad. But the situation is still looking pretty bleak, at least until late 2012:
Because the international odds of recession are more imprecisely estimated, one must be careful with a strict interpretation of this result. But the message is clear. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession. However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.
If a recession does unfold as the Fed says is likely, the time table would be pretty damning for Obama's re-election chances. And in the end, there may also not be much he can do about it. As the New York Times wrote during the G20 meeting earlier this month, America's own precarious fiscal situation has narrowed its tools for dealing with an international crisis. Unlike the 1990s, when we led bailouts of Mexico and Asia, now we're mostly playing a rhetorical role, while Europe begs for support from a skeptical China.
So add this to your list of reasons for 90s nostalgia: Even the financial crises were better then.