Fed Economists: 2012 Recession Odds Top 50%

The odds of a U.S. recession in early 2012 exceed 50 percent as a result of Europe’s debt crisis, according to researchers at the Federal Reserve Bank of San Francisco.

“Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic,” economist Travis Berge, research associate Early Elias and research advisor Oscar Jorda wrote in a paper released by the bank today. “A European sovereign debt default may well sink the United States back into recession.”

The probability that the world’s largest economy will slip into another slump has increased since last year, when Berge and Jorda estimated a one-in-two chance such an event would occur toward the first six months of 2012.

Japan’s earthquake and tsunami in March 2011 disrupted supply chains in the U.S. auto industry “far more than expected,” showing how events overseas can influence the American economy, the researchers said. Now, Europe’s “deteriorating fiscal realities” are “keeping many a trader awake at night, reliving the nightmare of the near-collapse of financial markets in the wake of the Lehman Brothers bankruptcy,” the paper said.

Forecasts indicate that “the odds are greater than 50 percent that we will experience a recession sometime early in 2012,” the authors wrote. “However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.”

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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