Economy still feeling recession's effects in The U.S

Economists began 2011 highly optimistic about the prospects for economic growth this year and in 2012. They have been sorely disappointed. As the U.S. economy continues to struggle to recover from the problems that grew out of the 2008 recession, the economy has suffered the second economic "soft patch" in as many years.

Even worse, with rising concerns about the sustainability of global economic growth, the sunny economic forecast for the second half of 2011 increasingly seems at risk of "clouding over" -- if not of being "rained out" entirely. Because this economic cycle has made disappointing progress in creating new jobs and solving other problems within the economy, it is essential that the U.S. economy continue to expand for as long as possible.

The case for improved growth in the third quarter seems relatively strong. The sharp deceleration of growth we saw in the second quarter that has been termed the soft patch seemed largely due to supply disruptions growing out of the Japanese tsunami and the sharp spike earlier this year in commodity prices.

With Japan making better-than-expected progress toward resolving the supply disruptions, and with commodity prices easing back from their sharp run-up earlier this year, the odds of improved economic growth in the third quarter seem relatively solid. The auto industry, by itself, could add 0.5 percent to as much as 2.5 percent to overall GDP growth in the third quarter as it makes up for lost production. Still, improved economic growth is far from guaranteed.

Consumer spending growth decelerated sharply in the second quarter as gasoline and other living costs spiked higher. Although those costs have moderated, consumer confidence plunged as prices rose and has not bounced back significantly.

We saw a similar loss of confidence in the business community, particularly among smaller businesses. If the public loss of confidence continues to hamper spending, the growth surge as we emerge from the economic soft patch may be muted.

As we look to the end of 2011 and into 2012, two additional problems present rising risks to continued growth of the U.S. economy. Over the course of this economic cycle, the domestic sources of economic growth -- consumer and business spending -- have provided very weak growth compared to previous economic cycles.

Fortunately, strong export growth has provided a much-needed spark of growth for the broader U.S. economy. But we now see two significant trends in overseas markets that could severely limit the growth that exports will provide.

Problems centered in the heavily indebted sovereign nations of  Europe have reduced the potential for economic growth in that region and pose the possibility of another significant credit crisis that could also restrict global economic growth. With sharply divergent political interests making it difficult to find a meaningful solution to the financial problem, the risks that financial markets will impose a solution through crisis have risen dramatically.

While restricting debt defaults to one or two of the smaller European debtors may be possible, financial crises by their very nature have a tendency to cascade out of control. Cascading defaults in Greece, Ireland, Portugal, Italy and Spain could create significant losses for banks around the world. That could push Europe and a number of economies around the world into recession.

Rate concerns
Europe is a significant export market for the United States, so the trends toward slowing European growth and the risks of a European credit crisis constitute significant "storm clouds" for the U.S. economy as we look toward the end of the year.

The "clouds" are also darkening on the horizon as we look to the emerging markets of the world. Inthe past year, many emerging countries raised interest rates to combat sharply higher inflation rates.

Interest-rate hikes, however, tend to reduce economic growth -- but with a very long lag. Emerging economies that were the first to raise rates are now showing sharply slower economic growth. As we approach the point where hikes implemented over the last year should have their maximum effect on the respective economies, it seems likely that we will see more slowing in many parts of the emerging world.

Since the emerging economies have been an important source of growth for most other countries of the world, significant slowing in the emerging markets would darken the prospects for the global economy significantly.

While the outlook may be growing darker, it is by no means bleak. While the cautious spending of consumers and businesses have made this an anemic growth cycle, that same cautiousness has also helped the economy avoid some of the excesses that tend to make recessions more severe.

Thus, even if the economy does begin to slip back into recession this year or next, we have reason to hope that it would be shorter and/or less severe than a "typical" economic downturn. At the same time, we also need to keep in mind that the aging of economic cycles tends to be a natural part of the process.

While recessions are not required by law, like the passage from the warm breezes of summer to the harsh winds of winter, this growth cycle will almost certainly succumb to another recession at some point.

Still, as important as the shorter term "seasonal" changes of the economy may be, the real question is whether the U.S. economy can meet the challenges it must overcome to prosper in a world that is increasingly global. This economic cycle has been all the more challenging because of the ongoing equalization of global economic power between the already-industrialized countries of the world and the many new emerging economies.

True economic prosperity is not rooted in the roughly four-year economic cycle, but instead comes from the careful long-term development that prepares an economy to produce the quality goods and services that others will want to buy in the decades ahead.