The Wall Street Journal reports:
Economists see a one in three chance the U.S. will slip into recession over the next twelve months and doubt any steps the Federal Reserve might take at its meeting next week can change that.
Those are the highest odds for a new downturn that the economists in The Wall Street Journal survey have given since the start of the recovery—and up four percentage points from last month’s poll. Economic strains have escalated amid market turmoil, the stumbling job market and concern about European stability.
What is more, the Federal Reserve has already pulled out all the stops. With this sort of outlook the jobs picture isn’t likely to improve:
All the major cards have been dealt. The monetary actions will only have marginal effects on the economy,” says Song Won Sohn of California State University.
In line with this gloomy outlook, the economists lowered their growth forecasts for the rest of 2011 and 2012. They now expect gross domestic product to expand less than 2.5% at a seasonally adjusted annual rate for the rest of this year and for all of next—down from estimates near 3% just two months ago. As a result, they expect the economy to add just 125,000 jobs a month over the next year, barely enough to keep up with population growth. Last month they estimated the economy would create about 148,000 jobs a month.
Former Bush official Matt McDonald, who is now a business and communications consultant, tells me that the risk of recession is high given the state of EU economies: “They are a huge trading partner, and things look bad over there.” Indeed, the fear of another financial meltdown, this time over sovereign debt rather than mortgage derivatives, is already spooking the markets.
Unless the economy unexpectedly revives, the grim predictions will likely have several ramifications. First, President Obama’s talk of tax increases will sound increasingly bizarre. In December 2010 he acknowledged that the economy couldn’t take a tax hike. Why should we think differently now? The excuse that taxes won’t kick in until 2013 is silly. Even Democrats understand that with tax increases hovering over their heads, employers won’t be encouraged to hire more people.
This, however, may actually increase the prospects of a deal in the supercommittee. Which Democrats are going to insist on tax hikes now? If that idea is off the table, a major impediment to a deal is removed. Democrats, of course, will urge cuts in defense, but even that seems irresponsible purely from a job-creation standpoint. How many more people will lose their jobs when weapons systems are eliminated or curtailed?
The news may also impact the Republican primary. The worse the economy, the less RomneyCare becomes an issue and the more Mitt Romney can flaunt his business acumen. In the last debate he briefly made the argument that Texas Gov. Rick Perry was essentially a caretaker, but that he is a turnaround specialist. That argument will be more convincing as the economy worsens, particular if Perry lacks concrete plans to spur growth and unemployment. It also may help Rick Santorum, who supports a push to increase domestic manufacturing, garner more attention.
But, of course, the most dramatic effect will be on Obama’s already dimming reelection prospects. After assuring us a recovery was underway, he’ll need to convince voters that, despite presiding over an unemployment rate of 9 percent or greater and a worsening growth rate, he deserves another four years. That’s a message that will be hard to sell, even with hundreds of millions of dollars in the campaign war chest.