If You Think the Risk of a U.S. Recession is Gone, Think Again
The latest economic data in the U.S. hasn’t been so bad. We’ve actually seen a number of positive surprises. This has led many to think the risks of another recession are pretty much gone. But a recent report from one of the regional Federal Reserve banks suggests otherwise.
The Fed uses several economic models to forecast recessions. The San Francisco Fed, for example, has just updated its recession model. The recent adjustment incorporates risks coming out of Europe. Here is the conclusion of this new economic model:
“The combination of recession risks is quite disconcerting. It indicates that the odds are greater than 50% that we will experience a recession sometime early in 2012. Because the international odds of recession are more imprecisely estimated, one must be careful with a strict interpretation of this result. But the message is clear. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession. However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.”
So if you think 2012 will be a great year for the U.S. economy, think again. The economy isn’t strong enough to withstand a more significant debt crisis in Europe. If the Eurozone goes into a recession, which is very likely, the U.S. will probably go into a recession as well.
For now the market has completely forgotten about the risks of another recession here in the U.S.. But I think the “double-dip recession theme” will soon be back at the headlines. When this happens, it will be a good time to short commodity currencies such as the Mexican peso and the South African rand.