The European debt crisis is raising the odds of a U.S. recession, with economic contraction more likely than not by early 2012, according to research from the San Francisco Federal Reserve Bank.
While it is difficult to gauge the odds precisely, an analysis of leading U.S. economic indicators suggests a rising chance of a recession through the end of the year and into early next year, researchers at the regional Fed bank wrote on Monday. The risk of recession recedes after the second half of 2012, they found.
New governments in Greece and Italy, with fresh promises to tackle fiscal problems have in recent days, allayed investor concerns about a near-term sovereign debt default in the euro zone, but Europe's debt crisis is far from resolved. The region is facing its worst hour since World War II, German Chancellor Angela Merkel said on Monday.
Although domestic threats to economic growth in the United States are limited, a shock from abroad could derail a fragile recovery.
The weak U.S. economy is more than usually vulnerable to turbulence beyond its borders, as the unexpectedly severe U.S. effects from Japan's devastating earthquake in March demonstrates, the researchers said.
A European sovereign debt default may well sink the United States back into recession, wrote Travis Berge, Early Elias and Oscar Jorda in the latest San Francisco Fed Economic Letter. However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.
The assessment of recession risk is more dire than that of many private economists. A November 4 Reuters poll of primary dealers shows Wall Street economists see a 30 percent chance of a U.S. recession next year, down from 35.5 percent a month earlier.
Last week the Federal Reserve's influential vice chairwoman Janet Yellen warned on the threat from Europe, saying governments there need to take forceful steps to contain the crisis or risk substantial damage to the United States.
Before taking her post at the Fed Board in Washington, Yellen headed the San Francisco Fed.
Her successor, John Williams, is due to give a major policy speech on Tuesday.
(Reporting by Ann Saphir; Editing by Padraic Cassidy)