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May 14, 2012

A European and American Recession

Europe has now moved into a recession, with even Germany facing a growth rate that hovers near zero. In Spain, the unemployment rate stands at 24.4 percent, almost exactly what the U.S. experienced in the summer of 1933 at the depth of the Great Depression. France faces a recession, as does Italy, the Balkans and Scandinavia. Greece and Portugal are in worse shape, but the quality of their national statistics masks the disaster. It is not a continent-wide catastrophe, but the European Central Bank forecast of a modest recession this year has come true. Democracy and peace remain novel adventures in many parts of that troubled continent, and I will be adding both happy conditions to my prayer requests for Europe this week.

 

In the U.S., we face the longest stretch of nearly uniform poor economic news in more than three years. New jobless claims have been slowly rising for several weeks, and the labor force shrinks dramatically (and far faster than demographics would suggest).

 

Over the last four months, job creation in the U.S. has dropped from potentially encouraging to barely enough to absorb natural population growth of working age adults. At the rate of job creation we've seen over the last couple months, we will never fully absorb those workers who lost their jobs in the recession. Consumer and business confidence is flat, and at least one private sector employment agency is predicting an uptick in layoffs this summer.

 

As disparate facts, the conditions in Europe and the U.S. are disconcerting. Taken together they are frightening. To hasten my worry, I spent a few hours this week running a battery of statistical tests on the relationship between the U.S. and European economies over the past half century. What I found was that year-to-year economic changes in Europe so strongly influenced the U.S. economy that another U.S. recession is highly probable, either this year or next. Indeed, the most optimistic of the dozen or so variations I examined points to inflation-adjusted growth of less than 1.5 percent over the next two years.

 

The mechanism of cross-Atlantic transfer of a recession is simply deep economic ties between the regions. Transatlantic trade with Europe runs at 5 percent of U.S. GDP, with 2011 exports running at $329 billion and imports at $447 billion. Financial markets are necessarily highly intertwined, and most large U.S. banks hold securities from EU nations, or assets from EU area banks (which in turn hold EU nation securities). The recession in Europe will reduce demand for U.S. goods in the region and ineffective governments risk bond defaults in several nations. This in turn will negatively affect both European and U.S. banks.   

 

I hope, but am not hopeful, that growth in China, India, Brazil and Russia will dampen this sour outlook and help buoy the U.S economy. Even so it will take an unlikely string of good luck for the U.S. economy to avoid a recession over the next year.

Link to this commentary: https://commentaries.cberdata.org/623/a-european-and-american-recession

Tags: insurance and worker benefits, recession, art, economy


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Hicks earned doctoral and master’s degrees in economics from the University of Tennessee and a bachelor’s degree in economics from Virginia Military Institute. He has authored two books and more than 60 scholarly works focusing on state and local public policy, including tax and expenditure policy and the impact of Wal-Mart on local economies.

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