The threat of a new recession is rising in the United States, economists say, as they slash their growth forecasts for the second half of the year.
Slowing global expansion, the plunge in US stock markets after Standard & Poor's cut the country's credit rating, and political pressure on the government to cut spending rather than stimulate growth are all putting the brakes on the world's largest economy, they say.
Mostly negative data -- though with a few bright spots -- has reinforced feelings that the recovery from the 2008-2009 recession is in trouble.
And the Federal Reserve's own warning last week of increased "downside risks" to growth in the second half has added to the gloomy picture.
Mark Zandi, the top economist for Moody's Analytics, said Monday they had cut their growth outlook for the second half to 2.0 percent, from a 3.5 percent forecast just last month.
"The near-term economic outlook is significantly weaker than it was just a month ago," he said in a new report.
"The odds of a renewed recession over the next 12 months are one in three, and rising with each 100-point drop in the Dow."
Goldman Sachs said the economy appeared to be moving at less than "stall speed" after, at best, a mere 0.8 percent growth in the first half.
"With growth clearly below trend, the unemployment rate has crept up slightly, suggesting the possibility of a self-reinforcing deterioration in the economy," Goldman said -- also predicting a 33 percent chance for a recession.
A raft of poor economics statistics -- on second quarter growth, layoffs and job creation, industrial production, consumer spending, and consumer and business sentiment -- underpin the lower projections.
On Friday, a University of Michigan survey showed consumer sentiment at its lowest level since May 1980.
And on Monday, the Fed's New York manufacturing survey for August also took a sharp downward turn.
The Fed gave no sense of optimism last week when it announced it would keep interest rates at ultra-low levels for two more years because of the weak economy.
After a one-day meeting, the US central bank's policy board forecast growth at a "somewhat slower pace" over the coming quarters than it had estimated in June.
"Downside risks to the economic outlook have increased," it added.
This cartoon by Schrank from The Independent on Sunday shows German Chancellor Angela Merkel and French President Nicolas Sarkozy relaxing on a pier in the shape of Europe, while Barack Obama surfs towards them on a giant wave marked 'U.S. Debt Crisis'.
COMMENTARY
Merkel and Sarkozy might have thought that they had earned a holiday after coming up with a second Greek rescue package (the newspaper headline reads "Greece bailed out again"), but the European pier (i.e., economy) looks decidedly rickety and risks being engulfed by the looming U.S. debt crisis. An American default would have disastrous consequences not only for the U.S. but the world economy, possibly starting a new recession.
Greece's recently approved austerity plan might not resolve deeper questions over how the country will repay its debts beyond this summer, but it appears one of the world's biggest investors still has faith in the country and and the greater eurozone. After all, it would be too risky not to.
Earlier this week, just days before the Greek Parliament approved austerity measures amid talks of a possible default, China said it would keep investing in Europe's sovereign debt. Premier Wen Jiabao told reporters that the country actually increased the purchase of government bonds of some European countries and hadn't scaled back its euro holdings.
These acts "show our confidence in the economies of Europe and the eurozone," he said.
China's backing isn't all that surprising. It was only earlier this year when the Asian giant supported debt-ridden Spain by signing $7.3 billion in deals that included investments in everything from energy to banking to oil. And it was around this time last year that China pledged to make more than a dozen major commercial contracts for business in Greece.
The value of these purchases may very well be in flux amid debt problems that have put many investors on alert, but that's beside the point of China's voracious appetite. China has more to gain than lose by investing in Europe's future. Even as misery and uncertainty mounts in the region, the eurozone is still China's largest export market (accounting for roughly 20% of total shipments) and it's in its own interest to contain the crisis.
"They're not really concerned about short-term volatility," says Domenico Lombardi, senior fellow specializing in international monetary relations and global currencies at Brookings Institution.
Besides, as China expert Barry Naughton of the University of California in San Diego, pointed out earlier this year: The risks are relatively low since the European Union and the European Central Bank will likely swoop into the rescue if things get really bad.
Wednesday's $41 billion worth of budget cuts and asset purchases was part of a large-scale bailout launched last year to help debt-troubled Greece pay its loans. The European Union and the International Monetary Fund had required Greek lawmakers to pass the plan before releasing its next round of rescue payments.
China's foreign-exchange reserve, worth more than $3 trillion, is by far the biggest in the world and is viewed by politicians and corporate executives as a key source of capital. It's unclear just how much China has boosted its holdings of European bonds, as leaders keep the breakdown of its holdings secret. But just by saying it will invest in Europe, China indirectly calms markets and helps stabilize the euro, and in a way, sends a message to the world at large that it's a good global neighbor willing to help in times of crisis.
Longer-term, the Chinese have been looking to diversify its massive reserves away from the volatile U.S. dollar. To be sure, the euro has also seen its share of peaks and valleys throughout the crisis but the currency is still the most practical alternative to the greenback, says Lombardi, whose research has focused on the ongoing European crisis.
This surely isn't the last time we'll hear the Chinese back the eurozone. If and likely when financial instability rumbles in other parts of Europe in the coming months, we'll probably hear from the Chinese again.
The threat of a new recession is rising in the United States, economists say, as they slash their growth forecasts for the second half of the year.
