There is a more than 50% chance of a recession next year, according to the Federal Reserve Bank of San Francisco Economic Letter, though the authors warn against “a strict interpretation of this result” since it involves imprecise estimates regarding the possibility of a recession stemming from international events.
Domestic factors are unlikely to spur a recession in the first half of 2012 and are only about one in three for the second half of the year, before declining.
“However, the curve reflecting the international odds suggests more imminent danger to the economy, although this threat is harder to calibrate using historical data and only indirectly reflects the health of the European financial system,” according to authors Travis J. Berge, an economist in the Research Department of the Federal Reserve Bank of Kansas City, Early Elias, a research associate with the Federal Reserve Bank of San Francisco, and “scar Jordà, a research advisor with the San Francisco Fed.
International factors peak toward the end of next year, with a 45% possibility of causing recession, and “decline rapidly thereafter.”
When all factors domestic and international are considered, “the odds are greater than 50% that we will experience a recession sometime early in 2012,” with the aforementioned caveat.
“But the message is clear,” according to the authors. “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.”
