Chance of U.S. recession rises to 1-in-4

08/09/2011 12:20 pm ET | Updated Oct 09, 2011

By Jason Lange

WASHINGTON, Aug 9 (Reuters) - The United States faces one-in-four odds of slipping back into recession, and a weaker economic outlook is raising the likelihood the Federal Reserve will soon do more to boost growth, a Reuters poll shows.

The world's biggest economy is still expected to pick up in the second half of the year as it shakes off high gasoline prices and factory disruptions created by Japan's earthquake in March, according to the monthly survey of more than 70 economists.

But recession fears have risen substantially in recent weeks. Stocks on the S&P 500 <.SPX> plunged more than 6 percent on Monday after Standard & Poor's downgraded U.S. sovereign debt late on Friday, further threatening consumer confidence.

Just two weeks ago, economists saw the chances of another recession at one-in-five. Now they see it at one-in-four.

The poll, taken as world stock markets staged their biggest fall since the dark days of the financial crisis in 2008 , showed lower growth expectations for the rest of this year.

Analysts slashed forecasts for the third quarter, bringing down the consensus by 0.8 percentage point to an annualized 2.3 percent, from 3.1 percent in the July poll.

"Weak stock markets, negative wealth effects and weak labor markets ... mean we're not going to see a quick recover y in the second half of the year," said Mark Miller, senior international economist at Lloyds Banking Group.

Thirty-five of 41 analysts who participated in the August and July polls have downgraded their forecasts for Q3 GDP.

Of the 13 primary dealers who contributed to this poll and the previous poll, all but one has downgraded their forecast.

While 2.3 percent growth would be an improvement over the paltry 1.3 percent growth in the second quarter, it would still indicate a vulnerable economy.

Analysts gave a 30 percent chance the U.S. central bank would launch a third round of bond purchases, or quantitative easing (QE3), within the next year.

Seven of 40 economists now see at least a 50 percent chance of more QE, compared with just one of 46 in a poll taken two months ago. The Federal Open Market Committee will announce its latest policy statement on Tuesday.

Fed officials expect growth to pick up substantially this quarter, and so far have appeared unlikely to consider a third round of quantitative easing.

"QE3 depends on how confident the Fed is in their own forecast," said Wells Fargo economist John Silvia.

However, analysts increasingly doubt that. Two months ago, the median probability polled for QE3 was just 15 percent.

Over the full year, analysts in the Reuters poll expected growth of 1.8 percent, below the Fed's forecast of up to 2 .9 percent and close to what some economists consider stall speed.

Economists' inflation expectations were relatively stable, edging down to 3.0 percent for 2011. In the July poll, analysts expected 3.1 percent inflation for the year.

The consensus for growth in the core consumer price index -- which strips out volatile food and energy prices -- tic ked higher to 1.6 percent for 2011, up from 1.5 percent.

That should leave the Fed with plenty of room to keep interest rates at record lows near zero well into next year.

Poll respondents again pushed back their expectations for when interest rates will rise. The Fed is expected to hold

them through the end of 2012. Previously, the consensus was for a rise in the second quarter.

(Writing by Jason Lange; Polling by Bangalore Polling Unit; Analysis by Ruby Cherian and Yati Himatsingka in Bangalo re; Editing by Susan Fenton)

Suggest a correction