A Wall Street Journal survey of 52 economists has put the odds at 1-in-4 that the U.S. will experience a recession in the next 12 months. When the Journal put the question to the same group in September, the odds were at 1-in-3.
A major aspect that could dampen U.S. recovery is Europe's debt crisis. The survey also said that there is a two-in-three chance that the eurozone will fall into a recession.
The flow of improving economic data continued in the past week with weekly jobless claims of 390,000 at a seven-month low. But Europe can still be a critical factor, as Greece works to qualify for its bailout and Italy names a new prime minister to replace Silvio Berlusconi.
Fears of Italian default could weigh heavily on the U.S. economy as it fights against a renewed economic downturn. With interest rates on 10-year Italian bonds rising above 7 percent, the mounting fears of an Italian default are clearly visible.
With the euro becoming extremely unsustainable in its current form, it is certain that the Americans are almost horrified at the possiblity of an unpleasant end to the single currency. It could result in the collapse of banking systems, drying up of credit and eventually a freefall of world trade, which is the last thing that Americans want at the moment.
According to IHS Global Insight at 27 percent of the global economy, the European Union is the world's largest player. A deep recession in Europe is certain to bring down the rest of the world along with it.
Suppose Italy defaults on its debt, the immediate consequence would be that exports to Europe will be slowed down. As a result of which, banks will be put in a situation where they will have to take losses on their European loans and debt insurance. This, in turn, will cause U.S. banks to tighten up lending resulting in a situation where there is a high probability that the U.S will be forced into recession.
There were also reports that German and French leaders have discussed creating a smaller eurozone made up of stronger economies. Senior policymakers in Paris, Berlin and Brussels, in their discussions brought forward the chances of one or more countries leaving the eurozone. But the discussion remained on an intellectual level and did not move to an operational level. The possibilities for severe actions to save the euro can be expected in the coming weeks. One thing for certain is that these will be seriously monitored by the U.S as it cannot afford to be forced into another recession in the near future.