Fed Surveys: Economy in Worse Shape Than Feared, Recession Odds Spike to 50%

Monday, 14 Nov 2011 02:24 PM

By Forrest Jones

The economy is in worse shape now than feared and the outlook for the next two years looks bleak, with the probability of a recession spiking in early 2012, Federal Reserve studies show.

Economists surveyed by the Federal Reserve Bank of Philadelphia lowered their U.S. economic growth outlook for the next two years while hiking up their forecasts for unemployment rates, the bank reports.

The survey of 45 economic forecasts expect real gross domestic product (GDP) to grow at an annual rate of 2.6 percent this quarter, unchanged from a previous estimate.

It's all downhill from there for at least for another year.

The forecasters predict real GDP will grow 2.4 percent in 2012, down from a previous forecast of 2.6 percent, while growth for 2013 will come in at 2.7 percent, down from 2.9 percent once estimated.

(Getty Images photo)

Forget about unemployment rates ever returning to pre-recession levels typical of the early 2000s, as conditions today are about as good as it gets for years to come.

The unemployment rate expected to average 8.8 percent next year, up from an earlier forecast of 8.6 percent, the survey finds.

Unemployment rates for 2013 are forecast to come in at 8.4 percent, up from 8.1 percent.

"The outlook for growth and unemployment in the U.S. economy looks a little weaker now than it did three months ago," the Federal Reserve Bank of Philadelphia said in a statement.

Roll of the dice

A separate Federal Reserve study shows the European debt crisis is pushing the U.S. economy even closer to the brink of recession.

Economic contraction could come by early 2012, or just a few months away, according to research from the Federal Reserve Bank of San Francisco.

U.S. economic indicators are weak, and a default by any eurozone countries could send the chance of a recession striking early next year spiking, researchers at the regional Fed bank write, hitting a 50-50 chance during the first six months of the year.

"A European sovereign debt default may well sink the United States back into recession," Fed researchers write in a report.

"However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013."

Stall speed

Experts point out that if the U.S. economy doesn't grow with any more speed, it runs the risk of hitting stall speed.

Like an airplane, an economy moving too slowly will fail to generate enough lift and will stall out and crash.

The U.S. economy is facing five potholes on its path to more sustained growth: Housing, unemployment, public finances, infrastructure and weak credit markets, one expert contends.

"Until we get movement on those five things, we're at stall speed," says Mohamed El-Erian, CEO of Pimco, the world's largest bond fund.

Stall speed is particularly scary when talking about the economy as large as that of the U.S.

"We can talk about the probability of recession when unemployment is already too high, when the financial deficit is 9 percent of (gross domestic product), when interest rates are already at zero percent and when a quarter of the homeowners are already underwater on their mortgages. That is a terrifying concept. That is why everything must be done to avoid a slowdown in growth," El-Erian tells CNBC.

Other analysts agree that the country shouldn't breathe a sigh of relief when hearing growth forecasts in positive territory.

Weak economic indicators show it doesn't take much to push the economy right back into the depths of recession for a long time.

"While the likelihood of a recession [in the U.S.] has eased of late, the economy is still operating at only a modest pace and remains vulnerable to shocks," says Julia Coronado, chief North American economists at BNP Paribas, according to the Wall Street Journal.

Source: http://www.moneynews.com/StreetTalk/Fed-Economy-Recession/2011/11/14/id/417981