Europe's Woes Are Pushing Up the Odds of a Double-Dip Recession in the U.S.

A double-dip recession in the U.S. had become markedly less likely over the past few months. But Europe's crisis has scrambled that calculation, and not for the better. The United States gave the world a subprime mortgage crisis that became a full-fledged financial crisis, and now Europe is handing us all a sovereign debt crisis. If it all weren't so self-defeating, there'd be some black humor in there somewhere. Alas, the potential impact on the U.S. economy does not permit us the luxury of laughing, especially when a senior European banker, Josef Ackermann of Deutsche Bank, tells us Greece may yet default, and crank up the turbulence once again.

The Philadelphia Fed today said that the likelihood of a double-dip in the United States has ebbed considerably. "The risk of a contraction continues to diminish," it said. Its Survey of Professional Forecasters wound up on May 11, a day that puts it smack dab in the middle of the Greece crisis, with some answers to the Fed's questions having come before, and some during the harrowing days of mid-May. May 11, was, of course, a euphoric day in markets; only later did worries about the European rescue package set in. So, we can reasonably assume that the survey does not reflect the extent to which the European crisis has become a wild card for the U.S. economy.

Exactly how wild remains to be seen, but here is a pessimist's guide to this question:

Money market turbulence can hardly be good for a credit-strapped economy. The possibility of a Greek default, and then the pullback from the brink, send the rates at which banks borrow from one another skyrocketing. They came down afterward, but not back to pre-Greece levels. In any case, higher interbank borrowing costs ultimately feed through to the credit costs paid by businesses and consumers, though this process is anything but an even one.

A stronger dollar has a downside. Money streamed out of euro-denominated assets into dollar-denominated ones, sending the euro tumbling and the dollar on a corresponding rise. This makes a mockery of any notions that heavy borrowing by the United States will lead investors to lose faith in American creditworthiness, but it does make exports more expensive. Since external demand is an important component in the still-embryonic U.S. recovery, that ain't good.

Business executives, in contrast to economic forecasters, never got over their fear of a double-dip. So they are easily spooked these days. David Williams, CEO of Deloitte FInancial Advisory Services: 84 percent of the 1300 executives it surveyed 84 percent were concerned about the possibility of a double-dip recession:

Many of our clients are optimistic about the economic recovery but have lingering concerns. They are worried about job growth as well as continued uncertainty within the financial and governmental sectors. The economic growth we experienced at the end of 2009 and the momentum that continues today has resulted in increased optimism; however, until the job picture stabilizes and the credit markets firm up, concerns will remain.

Image from World Economic Forum via Flickr