Moody's Mark Zandi Explains Why He Sees A 40% Chance Of A Recession

Mark Zandi

The U.S. economy is growing at a pace that leaves it vulnerable to a recession, according to Moody’s analytics chief economist Mark Zandi.

He believes there continues to be a 40%  probability of a recession in next six months to a year.

In his latest report, U.S. Macro Outlook: Barely Staying Afloat, Zandi points out three distinct threats to the U.S. economy: 

  • The European debt crisis – Already in a mild recession, austerity is crushing growth, exports are weakening, and European banks are taking too long to mark down the value of their sovereign debt holdings. The EFSF needs to be ratified soon and must be expanded, because delays will only create more turmoil in the banking system and financial markets. 
  • The U.S. foreclosure crisis – A further decline in home prices could threaten the U.S. recovery. “Key to the near-term price trend is the share of home sales that involve foreclosures, short sales, and other distressed properties. We expect a settlement before the end of 2011, meaning the foreclosure process will gear up this winter. …Moreover, with falling house prices pushing more homeowners under water (more than 14 million homeowners owe more than their homes’ market values), there is a risk this will ignite a self-reinforcing negative cycle of even more defaults, distress sales and price declines.”
  • The rift between the Obama administration and Congress – If Congress and Obama continue to butt heads over fiscal policy and do nothing, it could shave 1.7 percentage points from real GDP growth in 2012. It is critical that policymakers agree to extend and increase the payroll tax holiday for workers through 2012 because this would reduce the fiscal drag to a manageable 1 percentage point.

Zandi says only good policy making can save the economy from another recession. More than anything the government needs to arrive at some consensus on cutting its long-term deficit if it wants to shore up investor confidence and bring forth an economic recovery.

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