Economy

The U.S. Economy: Not Yet in the Clear?

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After yet another weak jobs report came out last Fridaythe U.S. private sector, it turns out, added just 38,000 jobs in Mayeconomists have been groping for an explanation. One theory is that the economy is still in a deep, deep funk: As the IMF warned back in 2009, it takes a long time for the world to recover from a severe financial crisis. It doesn’t help, either, that Congress now has zero interest in addressing unemployment, that the mere mention of further stimulus is verboten, and that the Federal Reserve is too skittish about inflation to consider more aggressive monetary policy.

But another theory on offer, most recently from Fed chairman Ben Bernanke on Tuesday, was that May was just a nasty hiccup, thanks to a few unexpected one-time events. There were the lingering economic shockwaves from that 9.0-magnitude earthquake in Japan, which punched a few holes in the global supply chain. Plus, uprisings in the Middle East have sent the price of oil soaring, and that always hurts. Oh yeah, and a once-in-a-century tornado rampage flattened big swaths of the Midwest. So maybe we just got unlucky.

But even if you believe this second theory (and many economists don’t), it’s not especially comforting. After all, unexpected crises and disasters seem to happen with a fair amount of regularity these days. If the plan for growth is to hope nothing sudden or jarring happens in the months ahead, that’s not a terribly prudent plan. So here’s a list of things that could still go very wrong in the months aheadand send our all-too-fragile economy reeling yet again:

The debt ceiling stays put. Democrats and Republicans are still no closer to a deal on lifting the debt ceiling. The consequences of not doing soeven for a brief spellcould be dire. Michael Ettlinger and Michael Linder of the Center for American Progress recently looked at what might’ve happened if the debt ceiling had stopped rising last year. The budget deficit for August and September 2010 was $125 billion. If the government had suddenly been forced to cut spending by that amount, GDP would have dropped 2.3 percentage pointsa worse quarterly drop than we experienced back in late 2008, deep in the throes of the financial crisis, and the worst since 1947. The GOP House leadership has quietly tried to assure Wall Street that things will never reach that point, but, as budget maven Stan Collender wrote in Roll Call on Tuesday, financial markets are already getting jitteryand that, in itself, could raise borrowing costs and bog down the broader economy.

Austerity fever takes hold. Sure, Republicans may finally agree to lift the debt ceiling. But what if, in return, they exact billions of dollars in immediate cuts to the federal budget? Even if you believe, as many conservatives do, that spending cuts help the economy over the longer term, it’s hard to see how mass layoffs of government employees improve matters in the near future. For the past year, we’ve been seeing growth in private-sector jobs partially counteracted by steep reductions in public-sector jobs, mostly at the state and local level. Unemployed people are unemployed people, regardless of where they last worked. Note that Britain’s experiment with austerity isn’t looking too good at this point.

Greece goes under. Just last week, Moody’s pegged the odds that Greece would either default on its debtsor seriously restructure themin the next five years at about 50 percent. Given that European banks are holding some $52 billion in Greek sovereign debt, the consequences of default for the global financial system could be far-reaching. Even Barack Obama, who’s normally sunny about U.S. economic prospects, recently fretted in public that a Greek default could create an “uncontrolled spiral” and “trigger a whole range of other events.” (E.U. policymakers are currently contemplating a new aid package for Greece and trying to figure out how to avoid exactly this scenario.)

Oil rockets upward. Yes, gas prices have simmered down in the past week. But it doesn’t take much for an oil-price spike to occur. The war in Libya, for instance, only threatened about 2 percent of the world’s supply of crude. But, as James Hamilton of the University of California San Diego explains, sometimes a small event is all it takes. “It’s hard to get people to reduce their consumption of oil,” says Hamilton. “Which is why it might take a 20 percent price increase to get people to cut back a mere 2 percent.” Worse, Hamilton has previously found that the oil shock of 2007-2008when prices approached $150/barrelwas a major trigger for the current recession. Which means we better hope Yemen doesn’t get too unruly and that those stories about how vulnerable Saudi oil infrastructure is to terrorism are overblown.

Hurricane season gets deadly. Forecasters expect that this summer and fall will be a particularly rowdy season for Atlantic hurricanes. Thanks, in part, to warmer ocean temperatures, Phil Klozbatch and Bill Gray of Colorado State University are predicting five “intense hurricanes” this year (the average from 1950 to 2000 was about two a year). A well-placed hurricane can wreak a fair bit of economic havocin 2005, the rough consensus among forecasters was that Katrina would shave off between one-half and one percentage point from U.S. economic growth in the short term. That wasn’t fatal back then, since the economy was still chugging along nicely. Now? Not so easy to, um, weather.

A wild card. No one foresaw the earthquake that rocked northern Japan and cracked open a nuclear reactor. No one predicted the BP oil spill either. So what other unforeseen surprises might lurk in the months ahead? Al Qaeda tries to avenge bin Laden's death? Pakistan and India stumble into conflict? A stodgy old tyrannical regimesay, North Koreasuddenly collapses? Rogue Chinese hackers decide to do something more ambitious, and destructive, than hack into Gmail? A newer, bolder swine flu? No one knows for sure. But it’s hard to imagine that sudden one-time jolts, a la the Libya war or the Fukushima meltdown, are a long-gone thing of the past.

Bradford Plumer is an associate editor at The New Republic.

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