Fears of double-dip recession keep U.S. on edge

Only months after most economists forecast that the Great Recession could be viewed safely through the rearview mirror, the European fiscal crisis poses an unsettling new challenge for the U.S. economy.

Few economists predict that the United States will pitch into another recession soon. But a still-weakened U.S. economy could be slowed by its European allies and trading partners. Even the optimists are wondering aloud whether the United States will encounter a slower and bumpier recovery than expected.

“Look, a double-dip recession is a genuine risk — I’d place it at 20 percent as opposed to 5 percent a few weeks ago,” said Robert Barbera, chief economist for ITG, who has been notably bullish on the U.S. economy. “We have some chronic problems in Europe, but I don’t see it leading us to a Lehman-style contagion.”

Perhaps so, but drops in stock markets, belligerent rumbles from North Korea and an American economy throwing off mixed signals has economists treading carefully. Rarely have so many central banks taken such extraordinary steps to stave off banking and national collapses.

James Bullard, president of the Federal Reserve Bank of St. Louis, traveled to London and gave a noticeably careful defense of the global economy in a speech. He did not discount the risk of a financial contagion jumping the Atlantic, given the weakened state of global finances and the risky nature of the bailouts. Governments and central banks must strive to re-establish credibility, he said, even as markets shake and gyrate.

There is no shortage of storm clouds to bolster a gloomier take. Japan and Europe are perched near the edge of deflation. And as one European leader after another takes a vow of austerity amid talk of layoffs and deep spending cuts, U.S. manufacturers may find their goods piling up in warehouses and on docks.

“We were counting on a weak dollar and a strong European economy; instead, we got a strong dollar and a weak Europe. That is clearly not good for our economy,” said Joseph Stiglitz, former chief economist of the World Bank and a professor of economics at Columbia University. “It certainly increases our likelihood of a double-dip recession.”

As well, LIBOR — London InterBank Offered Rate, the rate set in London that banks charge each other for short-term loans — has marched steadily upward in recent weeks, reaching a 10-month high last week.

Such loans serve as the fiscal grease that lets banks lend freely. Their rising cost slows lending — something Stiglitz said is a consequence of governments’ bailing out banks without forcing them to make a clean accounting of their losses and bad loans.

There also are lingering questions about the strength and sustainability of the American recovery — questions that loom as more important than ever given the weaknesses in Europe.

The American economy has picked up recently, with consumer spending jumping higher and debt falling sharply. Manufacturers have put a collective toe back into the hiring pool, and bankers are exhaling — even if they are not lending at their former levels.

“This has to go down as one of the most fragile economic recoveries in recorded history,” said David Rosenberg, chief economist for Gluskin Sheff, an investment firm.

Salvation could come from unexpected corners. The United States, in the words of the St. Louis Fed chief, might be “an unwitting beneficiary of the crisis in Europe.”

That is the lesson suggested by recent history. When the Asian economies shuddered and currencies nearly collapsed in 1998, many economists predicted the tremors would take down the U.S. and European economies. Quite the opposite occurred.

A stream of money flowed from Asian banks into U.S. Treasury bonds, and interest rates fell as a result. Oil prices also dropped. And the United States emerged stronger.

There is suggestive evidence that this could happen again. American interest rates have fallen recently as investors apparently seek refuge in Treasury bonds. And talk of a slowdown has caused the price of oil to fall.

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