Reuters provides us with the most important political news of the day—the European debt crisis has raised the odds of a U.S. recession to more than 50 percent by early 2012, according to a new report 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.
The San Francisco Fed provides a useful chart to illustrate the factors which are driving the risk of recession:
From now until the second half of 2012, the European debt crisis accounts for more than 30 percent of the risk of recession, while domestic factors account for a little less. It goes without saying that a recession would be terrible for Barack Obama’s re-election campaign. Negative economic growth – along with more unemployment – would destroy his middling approval ratings and virtually guarantee the election of a Republican president, and most likely, a Republican Congress.
The United States is restricted in what it can do to limit our risk from Europe, but there’s nothing to stop us from bolstering our position through aggressive monetary policy and renewed fiscal stimulus. “Weaker” currency and a larger deficit is nothing compared to an economy where thousands of businesses have shuttered and millions of people are unemployed. Of course, as this would likely keep Obama in office, it requires a political system whose actors are willing to set aside potential electoral gain for the economic health of the nation. At the moment, that’s a pipe dream.
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