San Francisco Federal Reserve Thinks Recession More Likely Than Not

According to research from the San Francisco Federal Reserve, the likelihood is that the U.S. economy is heading for a recession in early 2012. On Monday, the researchers revealed that an analysis of leading economic indicators is showing that the odds of a recession are increasing. The primary risk to the U.S. economy is the ongoing sovereign debt crisis in Europe. If the contagion were to make it difficult or impossible for large EU economies such as Italy to access their bond markets, it will likely send Europe into a deep recession, slowing the entire global economy. An outright Greek default would make such an outcome highly likely. In the latest San Francisco Fed Economic Letter, the authors write, "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." Naturally, this view, which puts recession odds above 50%, diverges rather substantially from the outlook of sell-side Wall Street economists who are projecting a 30% chance of U.S. recession next year. In light of the most recent data analysis from the San Francisco Fed, the Wall Street view appears to be more self-serving than an accurate representation of the risks.