The possibility of a recession this year or next is rising because growth is so weak. Weak growth makes the economy more vulnerable to shocks.
J Pat Carter/AP/File
Economic growth is slipping again. Growth in China and the eurozone has weakened. In the United States, it inched along at a feeble 0.4 percent annual rate in the first quarter and 1.3 percent in the second. Job creation has been anemic. Retail sales have been tepid, with no evidence of a coming upswing.
This makes a new recession a distinct possibility. With growth rates so weak, it will take less of a shock to push the economy into negative territory. An economy rising at a 4 percent annual rate can weather a shock that cuts growth by two percentage points and still be growing. But with a 2 percent annual rate, the economy would probably dip back into recession – and transform the political landscape for lawmakers of all stripes.
Several potential shocks could knock the economy off its feet (see my April 4 column, "A fragile recovery – and five shocks that threaten it"). Among them: a surge in energy prices, the eurozone financial crisis, the financial fallout from Japan's earthquake and tsunami, and a hard landing in China. The most likely culprit is a further 20 percent drop in house prices because of the depressing effect of an excess inventory of 2 million or more unsold homes.
A price drop of that magnitude would push the share of underwater mortgages (where homes are worth less than the amount owed on them) from 23 percent to 40 percent of all mortgages. That would seriously depress consumer spending, wreak havoc among mortgages and related securities, and push the unemployment rate back into double digits.