Putting aside the debt ceiling drama currently playing out in Washington and the dire predictions of what would happen to the U.S. and the global economy if the ceiling isn’t raised by Aug. 2, Goldman Sachs’ chief U.S. economist said that even if all that doesn’t come to pass, the U.S. economy will still slow this year and next and puts the chances of a return to recession somewhere between 15% and 20%.

Earlier this year, Jan Hatzius forecast 2011 would see the economy grow at 4% and predicted the next recession was “years away.”

What happened? 

Hatzius blames external factors like the oil price shock in the spring and the supply chain disruptions caused by the Japanese earthquake and tsunami. He also said consumers have not been spending and notes that the consumer sentiment index for July, compiled by the University of Michigan, fell to its lowest level since March 2009, putting it into “territory normally associated with recession.”

Hatzius said a key will be what happens to jobs and unemployment, which means that the next Bureau of Labor Statistics figure, due out this Friday, will be crucial.

Hatzius, who earlier this year predicting that the official unemployment rate -- currently at 9.2% -- would drop to 8% by the end of 2012, has now raised that figure to 8.75%.   

The longer unemployment stays at or above 9.2%, the greater the risk that 2012 number will also be higher, and the greater the risk of a slide back into recession for the U.S. economy.

Hatzius notes that the Federal Reserve would likely act in the event of a threatened downturn, a point Fed Chairman Ben Bernanke made in his last public statement on Fed policy. So if the economy stays weaker than expected, more monetary easing could be in the cards.

Of course, if the White House and Congress can’t work out a deal to raise the debt ceiling, all this talk of unemployment rates and consumer sentiment will be irrelevant as bigger issues will be at play.



Register or login for access to this item and much more

All On Wall Street content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access