Is U.S. Headed for Another Recession? Economists Weigh In

| by Alex Groberman

Things went from bad to worse in a hurry on Thursday as continuing economic anxiety in the United States, Europe and Asia led to the worst market drop in over two years.

In the midst of investors dumping their investments and holding back on making new ones, total stocks in the United States dropped approximately 5 percent. That coupled with the other poor market showings over the last two weeks has manifested itself into an 11 percent fall in prices during that time span. The few who are investing these days, it appears, are settling for the safer bets like treasury bonds.

The trouble isn’t limited to American financial affairs, though. An unsuccessful attempt by the European Central bank to steady the markets had the complete opposite effect. The bank bought bonds of smaller countries whose increasing troubles have appeared on the forefront of international news, but the move ended up doing far more harm than good.

Along the same lines, European Commission president Jose Manuel Barroso did the markets no favors by noting that problems do exist, and that the right steps to solve these problems have not yet been committed to.

“Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis," he said.

Back in the U.S., high unemployment rates and tepid economic growth have contributed to increasing concern that the country is on its way towards financial ruin. Because of this outlook, when stocks in Europe began declining on Thursday, the impact felt on the other side of the ocean was enormous. Soon enough, the American markets mimicked their European counterparts and prices fell – hard.

Over 14 billion shares were transacted on by the end of the day, marking the most frenzied selling day in over a year. Further, a loss of optimism -- resulting from weak economic data presented in recent days and a debt crisis that nearly led to the United States' first-ever default -- contributed to an increasingly negative perception of what’s to come.

When it was all said and done on Thursday, the Standard & Poor’s 500-stock index was down 60.27 points, or 4.78 percent, to 1,200.07. The Dow Jones industrial average was off 512.76 points, or 4.31 percent, to 11,383.68, and the Nasdaq was down 136.68, or 5.08 percent, to 2,556.39.

The S.& P. 500, meanwhile, has now fallen 10.7 percent from 1,345 on July 22.

White House spokesman Jay Carney was understandably short in regards to Thursday’s collapse.

“Markets go up and down,” he said. “We obviously are monitoring the situation in Europe closely.”

So what does this mean for the U.S. in terms of the big picture? Should Americans begin to mentally prepare for another recession?

The economists have opposing views.

“This economy is really balanced on the edge,” Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth.”

Feldstein’s sentiments are echoed by many others, with some pointing to the lower than expected recent rise in GDP as an unfortunate indicator.

“The slower the growth rate, the more likely it is that an adverse shock would cause a recession,” Stanford University economist Robert Hall said in an interview.

Economists also advise investors not to underestimate the power of the Fed.

“Not surprisingly the longer the Fed waits to raise interest rates, typically the longer the expansion will be. According to our US Economics team the Fed is expected to tighten monetary policy in November this year or 29 months after leaving recession in June 2009,” the Deutsche Bank recently noted.

Still, not everyone is looking at the glass as being half empty. An eternal optimist, Carney did his best to calm recession concerns on Wednesday.

“We do not believe that there is a threat there of a double-dip recession. We believe that the economy will continue to grow. There is no question that growth has slowed over the past two quarters. There's no question that job creation has slowed. But there are reasons for that —again, some of them beyond our control — but that are beginning to — the headwinds created by them like the earthquake in Japan, have subsided somewhat. But there are other challenges that we have to contend with, including high energy prices, the situation in Europe, et cetera.”

The mixed bag of analysis on America’s true economic standing was to be expected. Unlike years past, though, this batch of uncertainty seems to stem from a genuine lack of knowing about what the future holds -- not the political mind games perpetuated by every which party that have become commonplace.

For now, all anyone can do -- economists included -- is sit back and keep a close eye on what happens, not just in the U.S., but overseas as well.

The global economy is holding on by a thread, and the line between much-needed growth and a potentially-catastrophic collapse is very, very thin.