Opinion and Economic Analysis

HICKS: European recession likely to affect U.S. economy, too

May 12, 2012

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. Greece and Portugal are in worse shape, but the quality of their national statistics masks the disaster. Although it is not a continent-wide catastrophe, the European Central Bank’s 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 United States, 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 is shrinking dramatically (and far faster than demographics would suggest).

Over the last four months, job creation in the United States 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 of 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 United States 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 domestic 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 a recession’s cross-Atlantic transfer is simply deep economic ties. Trans-Atlantic trade with Europe runs at 5 percent of the United States’ gross domestic product, with 2011 exports of $329 billion and imports of $447 billion. Financial markets are highly intertwined, and most large U.S. banks hold securities from EU nations or assets from EU area banks (which in turn hold EU nations’ securities).

The recession in Europe will reduce demand for U.S. goods in the region and ineffective governments will risk bond defaults in several nations. This in turn will hurt 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.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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